• Economic Interdependence
• Perceived Military Threat – Taiwan, US Hegemony in the Pacific
• US insistence on political liberalization & implementation of Rule of Law – HR, Labor Rights, Religious Freedom, civil society
• Chinese Leadership Mindset & Domestic Challenges - local-central government conflicts, civil unrest
• What the US can do to foster improved relations, trade and further US interests

The Sino-US trade relationship is the best foundation for maintaining the peaceful status quo between the two countries. Since the Tiananmen crisis in 1989, and the fall of the Soviet Union in 1991, both Chinese and US military experts have eyed each other warily, suspecting the other’s motives, and quietly anticipating "the coming conflict."

Since Deng Xiaoping’s ‘reform and opening’ began in 1979, the US-Chinese trade relationship has increased steadily, culminating in China’s WTO accession in December 2001. Despite conflict, this relationship has created a level of interdependence that neither side could walk away from without significant harm. China arguably has more to lose by a disruption in the Sino-US trade relationship, but US consumers would undoubtedly regret the lack of cheap Chinese goods that they now take for granted.

China has built a trade imbalance with the US approaching $85 billion in 2001, absorbing billions more in direct investment from US companies. At the same time China has effectively protected its markets from US goods and services through tariffs and non-tariff barriers. China has used the trade imbalance to its advantage, investing heavily in infrastructure, as well as modernizing the military. China has also invested heavily in US Treasury instruments, which further binds China’s interest in smooth Sino-US relations.

US consumers are heavily dependent on cheap consumer goods made primarily in China. There are no practical substitute supplier-nations for the volumes of garments, footwear, electronics and other light industrial goods that China produces. Many US and European importers have explored other, even cheaper supplier-nations, including India, Bangladesh, Vietnam, Indonesia and Myanmar. Each of these nations lacks either consistent quality, ability to fill high volume orders, low prices or the political stability necessary for long term relationships required by major importers.

US industry has invested heavily in China, hoping to gain a foothold in the 1.2 billion strong China market, with every major US corporation investing in China to some extent. The Chinese government has learned to lobby US business as an effective proxy to the US government. As trade-war brinkmanship transpired regularly during the mid 1990’s, China would counter-threaten US textile embargoes and "Super 301" punitive duties by announcing counter-duties on US manufactured goods, such as telephone switching gear; which would quickly galvanize Motorola’s and AT&T’s lobbying teams in Washington to push for resolution of the dispute. Jiang Zemin was once quoted as saying, "I don’t need to increase duties, I just won’t buy Boeing this year."

Steady Sino-US trade benefits both the US and Chinese economies, and a healthy trade relationship is actively encouraged by both national governments. However, there are many potential issues that can potentially derail the relationship.

The period from 1989 to 1991 saw a dramatic shift in the Sino-US military relationship. The genesis of "the China Threat" dates to the Tiananmen crisis in 1989, which revealed the "true nature" of the Chinese military. The fall of the Soviet Union and the end of the cold war essentially signaled the end of the "China Card." The US no longer needed China as a potential ally against the Soviets, and the threat of China opening a second front during a world war was no longer a necessary deterrent.

US military planners, faced with downsizing and the ‘peace dividend’ were able to focus more attention on China as a potential future adversary. The Gulf War in 1990 effectively pitted Chinese equipment and the ‘overwhelming numbers’ strategy against the US’ high-tech, force-multiplier strategy. The results came as a surprise to many in the Chinese military. Soon afterwards, China began an ambitious military modernization program, where ‘high-tech’ became a mantra for weapons development and technology acquisition.

The issue of Taiwan remains the greatest threat to peace. Mainland Chinese scholars are concerned about the prospect of Taiwan’s presidential elections in 2004, and the potential for Chen Shuibian’s DPP party to secure the presidency for another four years and make further gains in the legislature against the fractured KMT party. Chinese leaders worry that DPP success in two election cycles will give them the confidence to take more small steps towards independence, ultimately leading the DPP to declare independence, a key plank in their party platform, forcing the Mainland leadership to invade Taiwan.

Some Chinese military leaders and scholars believe that by mid-2004, the PLA’s modernization campaign will be advanced enough that they could successfully invade Taiwan, and deny the US 7^th fleet access to the battlefield. China’s recent acquisition of a Russian Sovremenny class destroyer (with two more on order) with Sunburn anti-ship missiles are a direct threat to US carrier groups. The SS-N-22 Sunburn missiles are supersonic and designed specifically to defeat Ageis equipped cruisers and destroyers that would undoubtedly be guarding a US carrier group. It is suspected that the missile can select particular targets amongst a group, making them particularly threatening to an aircraft carrier. Song class & Russian built Kilo class diesel submarines pose a further headache to the US Navy and a strong deterrent to US surface vessels wishing to approach the Taiwan coast. Chinese leaders believe that the US political & military leadership will not risk the loss of a carrier (and 5,000 potential casualties) in the defense of Taiwan.

The US government’s pressure on Israel to stop the sale of their Phalcon Airborne radar system to China effectively limits the radar range of the Sovremenny destroyers, by eliminating their ability to look over the horizon and locate US carrier groups. The US government could not send any clearer signal about their apprehension over the advancement of the Chinese army/navy.

Hawks and nationalists on both sides of the Pacific see the enemy across the water. Incidents such as the EP-3 grounding, and the Belgrade Embassy bombing increase the rhetoric on both sides. Chinese scholars are quick to take offence at perceived US ‘hegemony’ in the Pacific. Recent increased US military involvement in Uzbekistan and the Philippines after the closing of Subic Bay further confirms to many Chinese that the US is ‘containing’ China by a ring a bases in Korea, Japan, the South China Sea, and now, Central Asia.

While Taiwan remains the key potential hotspot, there are several other powder kegs where the US could find itself in conflict with China. China’s claims to the Spratley Islands in the South China Sea could lead to conflicts with the Philippines, a longtime US ally. The US would also be obligated to keep open South China Sea shipping lanes, so that Middle East oil can continue to flow to Japan. North Korea remains an unpredictable element and could potentially pit US and Chinese troops against each other again.

All these potential conflicts provide hawks in both countries with the rallying points to garner support and press for increased military budgets and vigilance against the potential future enemy. Chinese leaders have hypothesized that June 2004 to December 2005 would be the ideal window to invade Taiwan should they declare independence and fend off the US military in a limited engagement. The March 2004 elections in Taiwan could provide the cause, while the November 2004 presidential election in the US would hamper a clear and decisive US response. The Chinese have learned from experience that in three years’ time, the world will largely forget an atrocity, so an invasion in 2004 will likely not effect production of the 2008 Olympics in Beijing.

In 1994, President Clinton ‘de-linked’ trade and human rights in China, stressing that active economic engagement would further development of a middle class and the resulting political and social reforms that would soon follow. In 2001, China and the US concluded bi-lateral negotiations and the US agreed to grant China Permanent Normal Trade Relations, paving the way for China to join the WTO. As part of the legislation to approve PNTR, the US Congress established two congressional commissions to monitor the impact of trade on the US security situation, and to monitor the implementation of ‘rule of law’ and human rights in China.

Several US politicians, labor unions and activist groups have taken a negative stance towards China on a variety of human rights issues. The Congressional-Executive Commission on China is a key forum for these legislators and the administration to air their negative perceptions on the human rights situation in China. While this commission appears to ‘re-link’ trade with human rights issues, it has little chance to compete with the business lobby who effectively support free trade with China within congress.

By all estimates, the traditionally liberal opposition to commercial engagement with China will remain a small voice amidst the cacophony of free trade supporters and the conservative business establishment who have already invested in China and have the resources to ensure that their interests are looked after.

In late 2002, the top Chinese leadership will undergo a significant transfer of power as the current generation passes the seats of power to the ‘fourth generation’ of leaders. The old guard, including Jiang Zemin and Li Peng have always been acutely aware of the possibility of China devolving into chaos (luan), if a firm grip is not maintained by the Communist Party. Their fathers lived through the turmoil of World War Two and the turbulence of the civil war against the Nationalists. The stories were passed down from one generation to the next with the admonition to never let it happen again. Jiang Zemin was catapulted to power by Deng Xiaoping in 1989 during the Tiananmen crisis and the overwhelming specter of national chaos. Zhu Rongji reportedly receives a daily brief each morning, detailing current unrest throughout China.

The incoming crop of leaders are maybe less fearful of luan than their predecessors, but they certainly understand that they serve at the pleasure of their seniors as long as they remain on the scene. The rise of civil unrest in the countryside and industrial North-East clearly underline the seriousness of reforming state enterprises, maintaining high levels of employment, and curtailing corruption in the countryside. Incoming president Hu Jintao is no stranger to firm tactics of civil control as governor of Tibet province during periods of unrest in 1988 and 1989.

As China adapts to its new status as a WTO member, it will undoubtedly have trouble complying with its obligations. Again, the first priority of the leadership is to retain power and prevent civil disorder by protecting the inefficient state companies and rooting out corruption by cadres in the countryside. The growth of civil society will be actively discouraged, as will the rise of religious ‘cults’ and secret societies that have threatened Chinese dynasties in the past. Economic reform is a priority only as it pertains to reforming state enterprises, sustaining employment, and bolstering the banking and finance system. Opening the market to foreign goods and services is not considered essential to ‘national security’ and therefore will not enjoy the unconditional support of the leadership.

The legal system will likely maintain its divergence from western standards as criminal law will continue to be employed for the benefit of the party, while commercial law will attempt to conform to the transparent requirements of the international business community. ‘Rule of law’ developments are likely to be limited to commercial laws, while criminal laws will be used to suppress internal dissent, maintain close control over the press, and help maintain the dominance of the communist party.

The current "stir-fry" trial of the China Venture Capital managers who manipulated their stock price by opening fictitious accounts can be seen as an example of how the criminal courts are still a blatant device of party control. Seven managers are being tried in order to restore confidence to the stock market which is likened to a casino by many traders. One manager is not being tried because it is believed he is connected to party officials who profited from the scheme. The verdicts and sentences were determined before the trial. Chinese criminal courts flaunt 99% conviction rates.

One major challenge to WTO conformity is the centuries old conflict between the provinces and the central government in Beijing. "The mountains are high, and the emperor is far away" is an old saying in China, and quoted often today. Throughout the 1990’s the province of Guangzhou refused to remit customs revenues to Beijing as all other provinces, but instead adopted a ‘contract system’ (cheng bao) in which a percentage of revenues was remitted, but the majority was retained to cover local expenses and fund projects. Local protectionism will continue, regardless of the wishes of the central government. Local governments receive less money from the central government than in the past, and have to be more self reliant on local revenues. As a result, provincial leaders might not be inclined to apply "national treatment" to foreign goods, including Chinese manufacturers’ goods from other provinces. This is a common occurrence today and is unlikely to be eliminated soon.

As local leaders are charged with raising revenue from their local industries, and responsible for maintaining order in their provinces, they are less likely to adhere to central government directives regarding opening markets to foreign goods and services.

Undoubtedly, the fear of chaos underlies almost every action taken by the Chinese leadership. Economic growth is intended to generate jobs, not wealth. Suppression of dissenters, Muslim and Tibetan separatists, corruption crack-downs are all calculated to prevent the disintegration of China. The Chinese leadership realizes that opening China’s markets to foreigners is a calculated risk, and will only allow it to continue so long as it furthers, or at the very least, does not conflict with their chief goal of preventing "the coming collapse of China."

At the hearings of the Congressional-Executive Commission on China in June, several commissioners asked panelists, "What should this commission do to improve rule of law and human rights in China?" The key response was, "how can we measure results one way or the other?"

The question of metrics in Sino-US relations will continue to be a vexing one. Snapshots of China’s society might reveal a thriving middle class in major cities, rising standards of living, and increasing freedom of movement and expression on one hand, and religious oppression, prisoners of conscience, frequent executions and organ harvesting of condemned prisoners on the other. Much as the three blind men garnered different impressions of an elephant, China is a massive, diverse country and anecdotes can be used to illustrate virtually any point. It is unlikely that there will ever be universally agreed upon measures of China’s advancement or regression on human rights and rule of law issues.

US politicians frequently visit China and promote their constituents’ products and projects. Other legislators harangue the Chinese government about abuses to their own people in purely rhetorical admonitions. Several US government departments actively engage in technical exchanges with Chinese government counterparts in an attempt to encourage emulation of US systems, particularly as an alternative to European or Japanese formats. Most US officials agree, ‘only China can change China.’

US government institutions such as the Congressional-Executive Commission on China, and visiting US government delegations are in a unique position to constructively encourage China’s development in the areas of human rights and rule of law, as well as report to congress on transgressions of internationally accepted norms.

While much discussion and congressional testimony has been submitted for the record about "what can we do to change China?" there has been little discussion about the Chinese perspective of US actions. There has also been no mention of the term, "face (mian zi)" which can be said to directly or indirectly drive almost every action and reaction by all levels of Chinese society.

A prime opportunity for a representative of the US government to ‘give face’ to the Chinese would be the handling of the recent labor unrest at the Da Qing Oilfields. The Da Qing demonstrations are extremely significant for two reasons. Firstly, Da Qing has been a propaganda legend in China during the Communist era. Workers throughout China were exhorted to ‘learn from Da Qing’ and emulate the oil workers’ selfless devotion to the motherland and to meet and exceed production quotas. As the gate of heaven to the workers’ paradise, Da Qing represents the epitome of the communist work ethic and the reward of a cradle-to-grave social system to generations of communist Chinese. Secondly, the organizers of the demonstrations, while demanding back pay & benefits, also demanded, though in a more subdued voice, the right to organize independent labor unions for the first time. For their efforts, the leaders were jailed. However, the demonstrations ended peacefully, and the workers’ demand for increased benefits were met.

The China Commission would be in a position to ‘congratulate’ the Chinese leadership for peaceful handling of the situation, while encouraging the release of the labor organizers, and the tacit approval of their demand for independent representation by a union. The giving and receiving of ‘face’ is such a key element in any Chinese relationship, that it should not be overlooked by government entities.

Continued reaffirmation of the US government’s "One China" policy on a regular basis would help allay fears on the part of mainland officials who are concerned that tacit US support for Taiwan independence could encourage DPP leaders to press for a declaration of independence, possibly forcing China’s hand. "One China" rhetoric in this case would offset some recent actions by the current administration which has had several recent official meetings with high level Taiwanese officials. Above all, the Taiwan issue is about mian zi.

Department of Commerce, USTR and pro-business organizations should encourage their Chinese counterparts to join the "Governmental Procurement Treaty," which Hong Kong and Taiwan have already joined. China has committed to begin negotiations to join the treaty within two years of WTO accession. China’s government procurements reached $8 billion last year, and are expected to rise to $12 billion this year. Unfortunately, China’s most recently revised procurement law excludes foreign companies from bidding on most projects, and requires local content in all components. Obviously, this is not in the spirit of WTO or of the Procurement Treaty, nor in the best interests of US companies, but the US can encourage China to begin negotiations quickly with an eye towards further integrating Chinese systems with the rest of the world.

By being positive on Chinese leadership successes, US leaders would have more leverage to press for continued issues of concern, such as proliferation of missile technology and equipment, as well as the human rights and trade issues.

As the ‘adulations’ and ‘condemnations’ are added up over time, the ‘scorecard’ would provide something of a metric by which China could be fairly judged.

Without interference, the Sino-US trade relationship will continue to grow and benefit both sides. Conceivably, this trade relationship will not negatively impact the security relationship between the two countries. Ideally, both US and Chinese government entities can find common ground and mutual respect to build social and legal reforms in China over time.

June 11, 2002