SINO-US RELATIONS: THE
ECONOMIC ASPECT
by B.Raman
For the post-1979 Chinese leadership, military strength
is only one component of national security. There are other
components equally important such as economic strength and technological
capability. In its view, without them, military strength, by itself,
is only of limited utility.
Mao-Dse-dong believed that power grows out of the barrel
of the gun. The present leadership believes that power equally grows
out of the money purse and the computer. It has, therefore, given
primacy of priority to reducing the economic and technological gaps with
Japan and then with the US.
Hence, its preoccupation with accelerating the economic
development of China--initially of the eastern and southern coastal
regions between 1979 and 1998 and now of central and western China.
The economic miracle, which was initially confined to
the coastal regions, was made possible by the wholesale transfer of
low-tech industries manufacturing items such as textiles, leather articles
and toys from Hong Kong and Taiwan to the coastal areas of Guangdong,
Fujian and Shanghai. As Hong Kong and Taiwanese businessmen shifted
their focus from low-tech to medium-tech and high-tech industries and from
the manufacturing to the services sector, they found it profitable to
transfer their low-tech holdings to the coastal provinces of China,
instead of discarding them, and continue to make profit by taking
advantage of the export facilities and tax concessions/exemptions offered
by the Chinese authorities in the Special Economic Zones and other areas.
China was fast able to emerge as a leading trading
nation by 1993 because the markets and business contacts, which these
low-tech industries of Hong Kong and Taiwan and their overseas Chinese
owners had built up in the USA, Japan and other countries, continued to be
available even after the shifting of these industries to China.
What really happened was that the same owners
manufacturing the same products continued to export them to the same
clients in the same markets--- but from Chinese territory instead of from
Hong Kong and Taiwan. Thus, as the quantity and value of the exports
of these products from their new locations in China went up, there was a
corresponding decline in their exports in the foreign trade of Hong Kong
and Taiwan, which was made good by these territories from their new
earnings from the export of medium-tech and high-tech goods and from the
services sector.
During the 14-year-period from 1979 to 1992, the total
value of the actual Foreign Direct Investment (FDI) in China amounted to
US $ 26 billion, an average of about US $ 1.8 billion per annum.
About 70 per cent of this ( US $ 18.2 billion) came from Hong Kong, Taiwan
and Macao and from the overseas Chinese businessmen of other countries
such as Singapore, Indonesia, Thailand, Malaysia and the Philippines.
Only about 30 per cent ( US $ 7.8 billion) came from
non-Chinese sources. Of this, US $ 3.08 billion came from the
US. Thus, the total FDI flows from the US into China during this
period amounted to about one-eighth of the total flow from all sources.
The year 1993-94 was a landmark year in the development
of the Chinese economy and of Sino-US economic relations. Firstly,
China started relaxing the curbs on the sale in the domestic market of the
goods manufactured by the enterprises with foreign participation.
Secondly, US businessmen came to be convinced of the durability of the
Chinese economic reforms. And, thirdly, the inhibiting factors
caused by the sanctions imposed by the US and other Western countries
after the Tiananmen Square massacre of 1989 started disappearing after the
easing/lifting of these sanctions.
Consequently, there was a surge in FDI flows into China
from all sources. During the seven-year-period between 1993 and
end-1999, the total value of actual FDI flows amounted to US $ 271.6
billion, an average of US $ 39 billion per annum. However, of this,
only US $ 22.4 billion came from the US--that is, much less than 10 per
cent of the total. While there was an increase in the value of the
FDI flows from the US from an average of US $ 0.22 billion per annum
before 1993 to an average of US $ 3.2 billion per annum after 1993, in
terms of percentage of the total FDI flows, the US flows came down from
one-eighth of the total before 1993 to less than one-tenth.
Amongst the reasons for this were:
* The tensions and uncertainties in the US-China
relations during the first term of Mr. Bill Clinton due to his
anti-China rhetoric during the election campaign, the granting of a
transit visa to the then Taiwanese President, Mr.Lee Teng-hui, the
movement of US ships to the Taiwan Straits in the beginning of 1996 to
deter any Chinese aggression against Taiwan etc.
* Disputes between the US and China over alleged
non-observance by China of intellectual property rights and over the
growing trade surplus in favour of China.
* Legal disputes between Beijing and US firms such as
the one following Beijing's peremptory order to the MacDonalds to shift
one of its restaurants from a prime location.
With the improvement in the relations in the second term
of Mr.Clinton with the new focus on a strategic partnership and the
sorting out of some of the trade-related disputes, the total value of FDI
flows from the US crossed the US $ 4 billion mark for the first time in
1999, touching US $ 4.2 billion out of a total all-source FDI flow of US $
40.4 billion, thus making the US the largest non-Chinese source of FDI
flows. But, it was still only about 10 per cent of the total.
This would indicate that the reservations in the minds
of US businessmen about the safety and profitability of their investments
have not yet totally disappeared. The bilateral tensions following
the US bombing of the Chinese Embassy in Belgrade in 1999 added to their
concerns.
The continuing cautious attitude of not only US
businessmen, but also the US authorities even during the Clinton
Administration, despite its talk of a strategic partnership, has been
reflected in the annual country commercial guide for fiscal 2001 in
respect of China for the benefit of US businessmen prepared by the Bureau
of Economics and Business of the US State Department.
This guide, prepared by officials of the Clinton
administration in July 2000, says:
* "China is rich in contradictions for US
firms. The world's most populous nation, China covers an area
larger than the US. Yet, the China market is small and concentrated in a
few areas along the eastern seaboard. China is one of the world's
oldest civilisations, with thousands of years of history, literature and
culture. Yet, the People's Republic is a mere 50 years old and most of
the laws and regulations governing business and trade have been written
in the past 20 years. Courtesy towards guests is a virtue in Chinese
culture and Chinese people can be extraordinarily hospitable and
kind. Yet, everyday discourse in China is rude and confrontational
and the China market is full of cheats and swindlers."
* "For over 200 hundred years, foreign firms have
been entranced by the enormous potential of the China market, a
potential that remains largely unfulfilled. US firms are major
investors in China and in 1998, actual US investment in China rose to
almost US $ 4 billion, but this is still less than US investments in the
UK ( US $ 4.6 billion) or Mexico ( US $ 4.7 billion) and is only
slightly more than what US firms invested in South Korea ( US $ 3.1
billion). The cumulative direct US investment in China is dwarfed by our
investments in Europe, Japan and Latin America."
* "China is a market with vast potential. The
trick is realising that potential. China's pending accession to
the World Trade Organisation (WTO) will make it easier for US firms to
do this, but it is false to believe that WTO entry provides an end-all
solution. Do your diligence--twice. Opportunities are available in
China, but companies must pay heed to the many obstacles. "
" A rude and confrontational nation"; " a
market full of cheats and swindlers"; and businessmen whose claims
and credentials must be verified at least twice before doing business with
them--- these were the perceptions and language of even the Clinton
Administration despite its toasting of China in public discourses.
In other words, the mistrust of China which officials of the Bush
Administration have been honest enough to voice publicly were being voiced
privately even by the Clinton Administration while publicly singing praise
of China.
BILATERAL TRADE
According to the statistics of the Chinese Customs, the
value of the Sino-US trade increased from US $ 12.88 million in 1972 to US
$ 2.45 billion in 1979. Between 1979, when the two countries
established normal diplomatic relations, and l989, China's imports from
and exports to the US annually grew by 15 per cent and 22 per cent
respectively. These growth rates were much higher than those of
either world trade or the average growth of China's foreign trade as a
whole. This steady upward growth has been maintained since then.
According to the Chinese Customs, China's foreign trade
with its top 10 trading partners maintained its significant growth in the
year 2000, with the bilateral trade with these 10 countries totaling US$
408.5 billion, making up 86 per cent of the country's total foreign trade
value.
Japan remained China's number one trading partner with
Sino-Japanese trade reaching US $ 83.17 billion. China's exports to Japan
topped US$ 41.65 billion, up 28.5 per cent and the imports from Japan
increased by 22.9 per cent to US$ 41.51 billion.
China's trade with the United States, its second-largest
trade partner, reached US$ 74.47 billion, up 21.2 per cent. Exports
to and imports from the US reached US$ 52.1 billion and US$ 22.36 billion
respectively, representing growths of 24.2 per cent and 14.8 per cent
respectively.
There has been a running dispute for many years between
the US and China over the misleading nature of each other's trade
statistics. According to the Chinese Customs, the total value of the
bilateral trade is US $ 74.47 billion with a trade surplus of US $ 30
billion in favour of China. But according to the US State
Department, the total value of the bilateral trade last year was US $ 109
billion--- US imports from China amounting to US $ 94 billion and exports
to China amounting to US $ 15 billion--- thus leaving a trade surplus of
US $ 79 billion in favour of China.
Why such a glaring discrepancy? The Chinese Customs
include in their export figures the value of only those goods
shipped/airlifted from China directly to the USA and exclude the value of
those products sent to Hong Kong for re-export to the US, which are shown
as exports to Hong Kong and not to the US. The US Customs, on the
other hand, include in their figures of imports from China the value of
all goods received from China, whether directly or via Hong Kong.
In their statistics of imports from the US, the Chinese
Customs include the value of all goods sent from the US to China, whether
directly or via Hong Kong, but the US Customs, on the other hand, include
in their statistics only goods directly sent to China and not those sent
to Hong Kong.
There is a similar fudging by the Chinese of the
statistics relating to FDI flows. Even though Hong Kong reverted to
China in 1997, Beijing continues to treat money invested by Hong Kong
businessmen in other provinces of China as FDI. Out of a total FDI
flow of US $ 40.4 billion in 1999, US $ 16.4 billion came from Hong Kong.
If one excludes this, the total FDI flows came to US $ 23.6 billion only,
of which the FDI from the US amounted to US $ 4.2 billion--roughly
one-sixth of the total flows from non-Hong Kong sources.
More than the impressive growth in China's foreign trade
during 2000, the most significant development of the year was the
increasingly important role of medium and high-tech goods in China's
external trade with all countries. As China embarked on a plan for
the accelerated development of the economies of the central and western
provinces to enable them to catch up with the much advanced coastal
provinces, it shifted the focus of development of the low-tech industries
to these provinces and assigned to the coastal provinces, which have
already built up a reservoir of human, technical and financial resources
since 1979 in view of the privileged position accorded to them, the task
of developing the core of the medium and high-tech industries.
The results of this policy are already evident in the
statistics for 2000. China's export of high-tech and new technology
products amounted to US$ 37 billion in 2000, an increase of 50 per cent
and accounting for 15 per cent of the country's total exports.
According to the Chinese Customs, China's total imports and exports of
high-tech and new technology products amounted to US$ 89.55 billion.
China's high-tech exports were mainly IT products, such as computers,
telecommunication systems and accessories. According to the US-based
market-research firm Gartner, 1.9 million personal computers were sold in
China in the first quarter of this year, up 38 per cent.
From the above, one could underline the following
significant aspects of the growing economic ties between the two
countries:
* The US has emerged as the largest non-Chinese source of
FDI flows into China, but it still accounts for only about one-tenth of
the FDI flows from all sources and one-sixth of the flows from non-Hong
Kong sources.
* The US has emerged as the largest trading partner of
China if US statistics are to be believed and as the second largest
trading partner, if Chinese figures are taken into account.
* The US has emerged as the largest single source of
foreign exchange earning for China amounting to US $ 30 billion
according to the Chinese and US $ 79 billion, according to the US
calculations.
The enormous benefits enjoyed by China from its economic
relations with the US have not evoked in the US the same criticism and
resentment as evoked in the past by US-Japan trade because till now the US
and Chinese economies have been complementary and not competitive.
The low-tech goods, which China has been exporting to the US, are no
longer produced in the US or made only in decreasing quantities.
Therefore, their import into the US is not costing the Americans their
jobs. On the contrary, they help to keep the inflation under
control.
Even though the value of the US exports to China is
still low, they come from sectors where US firms have been facing
difficulty in getting orders from other countries due to competition from
the European Union countries such as farming, fertilisers, power
equipment, telecommunications, pharmaceuticals, etc. Between 1979
and 1996, China bought 308 American civilian aircraft for $8.72 billion;
became the largest buyer of American wheat, importing 69.476 hundred
million tons valued at $11.62 billion; and spent $9.56 billion to import
46.243 million tons of chemical fertilizers.
While the returns for US businessmen from the Chinese
market may not have been up to their expectations till now, their
continued enthusiasm for the potential of the Chinese market may be
attributed to the following factors:
* The vast untapped potential of the services sector,
which is beginning to open up only now.
* The increase in the purchasing power of the Chinese
due to the economic miracle, which is already creating demands for
medium-tech and high-tech products such as refrigerators, consumer
electronics, personal automobiles, telephones, computers and accessories
etc
The US political leadership too, whether liberals or
conservative, Republicans or Democrats, see strategic advantages in
sustaining and further developing the economic linkages in the hope that
the economic liberalisation of China could ultimately lead to political
liberalisation. However, this hope is tempered by caution due to the
following concerns:
* The possibility of China emerging as a trading
competitor as it graduates from a low-tech to a medium and high-tech
economic power.
* The possibility of a race for markets in regions
such as Asia, Africa and Latin America.
* The upgradation of the Chinese military capability
made possible by its newly-acquired economic strength and technological
capability.
The strong Chinese interest in sustaining and developing
its economic linkages with the US arise partly from its anxiety to
maintain the upward growth, which would not be possible without the
benefit of the American market and FDI flows, and partly from its
aspirations of reducing the technological gap. The Chinese leaders
estimate that the present level of their technology is equal to that of
the US in the 1980s. They hope to upgrade it by 2010 to the level of
the US technology in the 1990s and catch up with the US by 2020.
They realise that this would not be possible without technological
linkages with the US and without inflows from there and that no country in
the world can significantly upgrade its technological capability without
the blessing of the US.
Thus, there is a common interest in the US as well as in
China in maintaining and strengthening the present economic linkages
without letting them be damaged seriously by what a Chinese analyst has
called the tumours in the otherwise healthy organism of Sino-US relations
which keep appearing from time to time such as the Taiwan, the
proliferation, the Tibet and the National Missile Defence (NMD) issues.
The political leaderships and the business class in the
two countries would see to it that these tumours do not become
malignant. One saw that during the Clinton Administration and one
would see that during the Bush Administration too. After the present
phase of rhetoric and confrontation, moderation would again set in at
Washington as well as in Beijing. It would be unwise and
short-sighted for India to think that the present confrontation would last
for long and that it could strategically take advantage of it.
(The writer is Additional Secretary (retd), Cabinet
Secretariat, Govt. of India, and, presently, Director, Institute For
Topical Studies, Chennai. E-Mail: corde@vsnl.com
)
