Subject: China Update
TO: Washington State China Relations Council Members & Friends
FROM: Joseph J. Borich, Executive Director
The following two e-mail messages, sent by former U.S. Foreign Service officer and China specialist Joe Borich, address directly the topic under discussion in this special section of American Diplomacy. A separate urgent message appeals for help for the victims of the recent earthquake in Taiwan; please give it your generous consideration. The author, who has contributed to this journal previously, here provides his analysis of current U.S.-China issues and his assessment of the post-summit state of relations. ~ Ed.
AUCKLAND SUMMIT: RELATIONS BACK ON TRACK
As planned, Presidents Clinton and Jiang met September 11 on the margins of the APEC leaders meeting in Auckland. U.S. National Security Advisor Sandy Berger characterized the one-hour meeting as “productive, friendly, non-polemical and quite comprehensive.” Berger also pronounced the relationship between the U.S. and China as “back on track, with, of course, many challenges still facing us.”
For Clinton, issue number one was the speedy resumption of WTO negotiations and an agreement this year. Clinton also called for a resumption of discussions on arms control and human rights issues, along with the restoration of military-to-military contacts, all of which were suspended by China after the accidental bombing in May of the Chinese embassy in Belgrade. Also on Clinton’s agenda was energy and sustainable development, in particular, climate change. Clinton raised the Taiwan issue last, saying that Taiwan President Lee’s statements had made thing more difficult for both the U.S. and China, reaffirming the U.S.’ one-China policy, but warning that China’s resort to force would have “grave consequences.”
Jiang’s response began with Taiwan, which he said was the most important issue between the U.S. and China. He stated that Beijing wanted a peaceful resolution based on one China, two systems (a formulation challenged by Lee’s “special state-to-state relationship” formula). But he also stated China would not renounce the possible use of force if Taiwan were to take actions toward independence. He also urged Clinton to discontinue arms sales to Taiwan. Jiang also agreed to resume WTO negotiations (in fact, technical discussions had already resumed a week earlier). He added that other issues raised by Clinton — i.e., arms control, military-to-military contacts, the environment, and human rights — could be addressed by the two sides in a positive manner, implying that China was ready again to fully engage.
In the two-week period prior to the “mini-summit” in Auckland, Beijing gave several other indications it was ready to improve relations with Washington. Leading newspapers and journals in China lowered the invective against the U.S. that had been in fashion throughout the summer, claiming instead that strong ties with the U.S. were important to China’s interests. After a long delay, China also gave its formal concurrence to the appointment of Joseph Prueher, former Commander-in-Chief of the Pacific Command, as U.S. Ambassador to China. Also in that same period China permitted the first visit to Hong Kong by an U.S. Navy vessel since the May bombing.
Nevertheless, while the Auckland meeting was straightforward and short on polemics, it was also short on breakthroughs. The atmospherics have warmed considerably and a broad ranging dialog is likely to be reinstated in the weeks ahead, but the major issues that have troubled the relationship are still there, and virtually unchanged.
CHINA AND WTO: THE RACE TO SEATTLE
The commitment by Presidents Clinton and Jiang to resume WTO negotiations notwithstanding, negotiations both immediately before and after the mini-summit apparently failed to produce any narrowing of the remaining gap. U.S. participants at the sessions described the negotiations as “wandering in circles,” without substantive engagement on the issues left over from Premier Zhu Rongji’s offer in April. For that matter, it wasn’t even clear if Zhu’s entire offer was still on the table. The two sides are to resume talks within 2-3 weeks.
Several recent high-level statements in China suggest, in fact, that Beijing may be seeking to roll back some of Zhu’s April offer.
- Information Industry Minister Wu Jichuan declared that foreign participation in the China internet market – whether by internet service providers, or internet content providers – was prohibited by law. Last year Wu closed 40 foreign investments in mobile phone services. Wu threatened to resign in April after learning of Zhu’s offer to open the information technology and telecommunications sectors to foreign participation.
- Some of China’s leaders may also be resisting foreign competition in agriculture. There have been recent indications that China will insist on maintaining agricultural subsidies for its farmers, subsidies that maintain prices in China for grain, cotton, edible oils and sugar up to 50 percent above world market prices.
- Even more worrisome, perhaps, was President Jiang’s statement to journalists at the APEC Leaders meeting that “China can only join the WTO as a developing country,” a claim that appeared to contravene the spirit and most of the substance of Zhu’s April offer.
There were probably relatively few issues unresolved by Zhu’s proposal last April. The U.S. still sought further liberalization in telecommunications, banking, and financial services, and greater protection from Chinese exports of textiles, steel and export surges generally. China wanted: an end to U.S. quotas on its exports; permanent Normal Trade Relations status from the U.S.; and accession to the WTO — hopefully by the time the “Seattle Round” starts. The rest of Zhu’s offer appeared to address fully — or, in some cases, even go beyond — what U.S. negotiators had been seeking.
Even assuming that negotiations can pick up substantively where they left off, closing the remaining distance will be more difficult now than in April. Mindful of the intense criticism his premier has been under since April, it will be extremely difficult politically for Jiang to concede any more to the U.S., improved atmospherics or not. On the other hand, Clinton must press for more concessions, else why did he not accept Zhu’s offer in April?
Moreover, the political landscape has shifted in the U.S. since the spring. Politicians on both the left and right are likely to hold China to a tougher standard because of allegations of Chinese nuclear espionage. Big labor has also come out strongly against China’s admission to the WTO, and both labor and the environmentalists say they would not support an agreement that did not satisfactorily address issues dear to each. All of this means that Clinton, improbably, must get a much better deal than Zhu offered, both to assure passage of permanent NTR in Congress and to keep the support of labor and other traditional Democratic constituencies intact for Al Gore.
Though both presidents insisted there is no fixed timeline to conclude negotiations, there is great pressure on China to wrap things up in time to accede at the start of the Seattle Round of WTO negotiations. China has its own agenda for economic reform and the sooner that WTO discipline can be brought to bear on reforms, the better. Moreover, many of the issues that will be on the table at the Seattle Round — agricultural trade being one — are considered extremely important in Beijing. China clearly wants to have a hand in writing the remaining rules that will govern international trade.
Whatever its tactical flaws (the better perceived through hindsight), there is no question that the Clinton Administration would like to usher China into the WTO. The potential benefits to the U.S. economy, and to the stabilization of the global economy and global security are too huge to ignore. The legacy Clinton has sought for his presidency, in fact, might well be defined by the downstream benefits of bringing China into the council of trading nations.
The question is, can he do it? Time is running out. The Seattle Round begins in barely two months. Congress, which must bless permanent NTR for China, will likely recess in early November. Senate Majority leader Trent Lott said that a permanent NTR measure is unlikely even to come up for a vote in this session, given the limited amount of time left and the Congress’ crowded agenda. Secretary of Commerce Daley issued a similar warning during the APEC meeting in Auckland. In the House, Majority Leader Dick Armey said this week that the votes are not there in the House even if permanent NTR makes its way to Congress’ fall agenda.
If the measure fails to come to a vote (or does, and fails to pass) in this session, the administration could still seek to revive it early in the next. However, the primary season would then be starting and Clinton might find himself politically distanced from candidate Gore and Democratic members of congress, unless the agreement reached with China was good enough to assuage Democratic constituencies such as labor, and that is unlikely.
There is another possibility, but it is not enticing. The U.S. and China could reach a bilateral agreement, and China could go on to conclude bilaterals with its other major trading partners. The members of its WTO working party on protocol rules would have to reach a consensus and the accession package would then be brought before the current WTO members for a vote. If two-thirds voted in favor, China would accede to the WTO. If by this time congress has still not approved permanent NTR for China, the U.S. would have no choice but to invoke the non-applicability clause. This would mean that China would not be bound to extend its market openings to American companies, and all of its concessions would apply to U.S. competitors in Europe, Japan and elsewhere.
The apparent long odds against China’s accession this year may, however, serve to focus negotiators on both sides to work for the best possible deal, and quickly. The warning flag has also been raised for the administration and congressional supporters of permanent NTR that there is much consensus building to be done, and little time remaining.
MEANWHILE, ECONOMIC REFORM MOVES AHEAD IN CHINA
The Fourth Plenary Session of the 15th People’s Congress opened in Beijing September 20. This annual event was expected to convene in October this year, but was apparently advanced to resolve more quickly disagreements that have emerged within the party over the pace and direction of state-owned enterprise reform, and the conditions for WTO entry. As is almost always the case in plenary sessions, this one will also reveal a reshuffling of senior party positions, and the new line-up. Changes at the top are not expected, but there will likely be a number of changes among the various party commissions and among provincial and municipal party leadership posts.
There appears to be a significant split between party economic reformers and conservatives over the issue of SOE reform. Led by Premier Zhu Rongji, the reformers want to speed up the pace of marketization and reduce government involvement in economic activity. In the process, most of China’s SOEs would be privatized, either through direct sale to private (including foreign) investors, or through reducing government ownership of SOE stock to less than 50 percent. The reformers see this as the best — and possibly only — way that China’s economy can compete effectively in the global market. The conservatives dispute this argument either on economic and ideological grounds, or over concern for wholesale layoffs that would likely result from privatization, or both.
This debate is also tied to China’s WTO bid. The reformers view WTO accession and the discipline that would be forced on China by the WTO as an important lever to accomplish economic reform and SOE privatization. Thus, the plenary session debate will not only set the course and pace for economic reform, it will also very likely dictate the outer limits of what China will concede in order to join the WTO. This may well help explain the apparent reluctance of China’s WTO negotiators to move more forthrightly in the wake of the Clinton-Jiang decision to resume WTO negotiations.
Even as the debate goes on, however, there are indications that China is still moving forward and economic reform and SOE restructuring:
- The People’s Bank of China (China’s central bank) recently announced a further liberalization of rules applied to foreign branch banks. Foreign branches authorized to conduct Renminbi transactions now have a substantially expanded geographic area in which to conduct such transactions, and can lend a higher percentage of their foreign currency debt in Renminbi. For the first time, they can also enter into lending agreements with Chinese banks for up to one year.
- MOFTEC has liberalized rules for foreign invested companies and will now allow FIEs to: act as agents or distributors in the Chinese market for sales of products they produce in China; provide warehouse and transport services for themselves; and purchase Chinese products and commodities in China for sale outside of China.
The bottom line is that economic reform will continue, but the question of reform pace and direction will likely be continue to be revisited — even after the current plenum.
Date: Thu, 5 Aug 1999
Subject: China Update
TO: Washington State China Relations Council Members & Friends
FROM: Joseph J. Borich, Executive Director
The following e-mail message, sent by former U.S. Foreign Service officer and China specialist Joe Borich, address directly the topic under discussion in this special section of American Diplomacy. A separate urgent message appeals for help for the victims of the recent earthquake in Taiwan; please give it your generous consideration. The author here provides his estimate of the late-summer state of U.S.-China relations: “Ice Beginning to Melt.”—Ed.
Since mid-June, there have been several signs that bilateral relations—which hit close to rock bottom in April/May—may be gradually improving.
- In mid-June, Undersecretary of State for Political Affairs Thomas Pickering went to Beijing to give Foreign Minister Tang Jiaxuan a detailed, written explanation of the accidental bombing of China’s embassy in Belgrade. The Chinese officially refused to accept the explanation, or the U.S. contention that the bombing was indeed an accident. One of the conditions Beijing had stipulated for resolving the bombing was the U.S. government identify those responsible for targeting the Embassy and punish them. Pickering’s explanation named no names and was silent on the issue of punishment. However, the Chinese side did discuss another of their conditions — compensation — with Pickering, and in a much more positive manner.
- Following Taiwan President Lee Teng-hui’s statement in mid-July that Taiwan and China had a special “state-to-state relationship” (a formulation angrily rejected by Beijing), Washington dispatched Assistant Secretary of State Stanley Roth and National Security Council Asian Affairs Director Kenneth Lieberthal to Beijing to meet with China’s Foreign Minister Tang Jiaxuan. The talks were publicly described only as “useful.” What that guarded comment meant was that Beijing was reassured the U.S.’s one-China policy remained firmly in place, Lee’s comments notwithstanding. (Roth and Lieberthal also cautioned China against resorting to a military response.) Beijing was no doubt further assured when Washington sent the American Institute in Taiwan’s chairman, Richard Bush, to Taipei to reinforce the U.S. position and also postponed a Pentagon delegation to Taiwan.
- The Roth-Lieberthal mission also cleared the way for a meeting between Secretary of State Madeleine Albright and Foreign Minister Tang, which took place in Singapore in late July on the margins of the ASEAN Regional Forum. After that meeting, the two sides announced that Presidents Clinton and Jiang would hold a summit meeting during the APEC Leaders Meeting in Auckland next month. Albright and Tang indicated that WTO negotiations would be at or near the top of the agenda when the two leaders met.
- Also in late July, Commerce Undersecretary for International Trade, David Aaron, went to Beijing to meet with the Minister of Foreign Trade and Economic Cooperation, Shi Guangsheng. Aaron’s mission was to try to re-start the bilateral economic dialog. Minister Shi agreed to reactivation of the Joint Commission on Commerce and Trade and offered to host the next meeting in Beijing this fall.
- On July 30, Department of State Legal Advisor David Andrews announced in Beijing that China had agreed to a $5.4 million settlement to compensate victims of the Belgrade embassy bombing and their families. Andrews also said that talks will begin next month to settle claims by each side for damage done to their respective diplomatic buildings in May.
- Probably also helping to soften China’s position were votes taken in both houses of Congress in the second half of July, overwhelmingly rejecting efforts to scuttle Normal Trade Relations status for China. The vote in the House was 260-170, a change of only four votes from 1998. In the Senate, a measure to force a Senate vote on NTR for China was defeated even more resoundingly, 87-12.
The resumption of high level contacts signaled that Beijing is beginning to emerge from its funk engendered by events in April and May — Washington’s rejection of Zhu Rongji’s WTO accession offer; the embassy bombing; and the release of the Cox Report. Still missing for the time being at least are any hints that China is ready to resume other equally important dialogs on international security, military-to-military contacts, and human rights. For that matter, it is still not clear when or if Beijing will be ready to conclude a bilateral agreement on its accession to the WTO.
PROSPECTS FOR WTO
If recent high level meetings and the promise of a summit next month point to a healing of damaged relations, they do not necessarily portend a quick and desirable outcome for U.S.-China negotiations on WTO. When Premier Zhu came to the U.S. in April, he wanted a deal on WTO and threw virtually all of China’s “cards” on the table (including many that were bound to draw strong resistance in China) in order to get one. Events since then have weakened Zhu’s position and strengthened those of economic and ideological conservatives. Meanwhile, China signed bilateral agreements with Japan and Australia in July. Though details are not known, both agreements are believed to contain fewer concessions than those offered to the U.S. by Zhu.
Although China has denied it would “walk back” any of the terms in Zhu’s offer, it will be politically difficult to sustain them and nearly impossible to offer more to the U.S. Zhu has been attacked vociferously for the offer, and some in the leadership are even questioning the value to China of rushing headlong into the global market. Even those who are not troubled by the ideological shift toward a fully marketized, open economy (and there are many who are) worry about a short-term but substantial increase in China’s already high unemployment and the added strain on social and political stability that would bring. The cleavage between those calling for faster, deeper economic restructuring and those arguing for stability at all cost has no doubt been broadened by the twin challenges of Fanlungong and Lee Teng-hui’s latest push at the one-China envelope. In any event, State Councilor (and former Minister of MOFTEC) Wu Yi felt constrained recently to offer a public reminder that the decision to seek WTO membership was made by no less an authority the Central Committee of the Communist Party.
However, Foreign Minister Tang reportedly said at a press conference in Singapore that China would only meet WTO entry conditions for developing countries. This would appear to contradict Zhu Rongji’s commitment to phase China’s accession to the WTO in the same period of time and to the same level as other major parties to the WTO, including industrialized countries. Adding to the concern, MOFTEC Vice Minister (and China’s chief WTO negotiator) Long Yongtu reportedly said in Beijing in early August he was not confident China could enter the WTO even if negotiations with the U.S. were resumed immediately. He apparently also sought to play down the importance of the WTO, claiming that bilateral—rather than multilateral—relations were the key element to global trade.
Undoubtedly much of the recent Chinese commentary is directly aimed at improving China’s bargaining position should WTO negotiations resume soon. But, these comments could also foreshadow a retreat — and perhaps a substantial one — from Zhu’s sweeping offer last April. China’s leaders are currently on their annual retreat at the seaside resort of Beidaihe, where they are discussing this and other major issues. Their return to Beijing may occasion an authoritative signal on when China will resume WTO negotiations, and how far it is still prepared to go.
TAIWAN-CHINA: “NO SYSTEM, TWO COUNTRIES”?
During a July 10 interview with a German radio service, Taiwan President Lee Teng-hui advocated that Taiwan and the mainland have “at least a special state-to-state relationship,” implying there were two separate, sovereign states of China that should treat each other — and be treated by the rest of the world — on an equal basis. In late July, the chairman of Taiwan’s unofficial Strait Exchange Foundation, Koo Chen-fu, sent to his counterpart organization on the mainland a detailed explanation of Lee’s comment. The explanation reads in part: “In the five decades since the PRC was established in 1949, China has been divided into two parts across the Taiwan Strait and ruled separately by two sovereign states. This has naturally resulted in a divided China characterized by a special relationship across the strait.”
Koo went on to cite the cultural and ethnic bond between the two sides, and the already-established dialog on civil and commercial affairs. Koo continued that the mainland’s one-China policy denied Taiwan’s existence and suggested that China is already unified. From Taiwan’s perspective, he added, “one China” is something for the future since China at present is divided and ruled separately by two equal sovereign states, requiring a special state-to-state relationship with each other. He called for both sides to pursue a unified China in the future by engaging in negotiations on the basis of parity.
Beijing reacted quickly and angrily to Lee’s formulation, and rejected Koo’s explanation. Beijing reminded Taiwan that while it sought reunification by peaceful means, it would resort to force if necessary to quell any Taiwan bid for independence. The U.S. government moved quickly to distance itself from Lee’s statement while warning Beijing against using force. President Clinton publicly reaffirmed the U.S. one-China policy, and conveyed his message personally to President Jiang via telephone. He also called on both sides to continue their dialog and to act with restraint.
Other than lambasting Lee, the PRC thus far has taken no stronger measures to convey its disapproval as it did in 1995, following Lee’s visit to the U.S. The scheduled visit to Taiwan in October of the Chairman of China’s unofficial Association for relations across the Taiwan Strait, Wang Daohan, is on hold pending a “satisfactory” explanation of Lee’s comments. Wang’s visit to Taiwan would be a benchmark in the cross-Strait dialog, and would reciprocate Koo Chen-fu’s visit to the mainland last year.
What inspired Lee’s comments, and why have they stirred a hornet’s nest in Beijing?
Until this decade, Taiwan was governed by a Leninist-style party with mainland origins that regarded Taiwan as a temporary haven until it could regain control of the mainland. The long-term “mission” of the pre-1990 Kuomintang (KMT) Party on Taiwan made it politically plausible, if logically inconsistent, to maintain that there was only one China and that Taiwan was a part of it. The issue of sovereignty never arose; the only question was whether the KMT or the Communists should be ruling all of China. Thus, there was no basis for challenging the statement in the Shanghai Communique (1972), establishing partial relations between the U.S. and China, that: “The U.S. acknowledges the position of Chinese on both sides of the Taiwan Strait that there is only one China and Taiwan is a part of it.” The essence of this statement was repeated without serious challenge in the 1979 Communique establishing full diplomatic relations, and in the 1982 Communique limiting U.S. arms sales to Taiwan.
In 1990, Taiwan held its first-ever popular election of its president. The winner, Taiwan-born Lee Teng-hui, initiated constitutional changes in 1990-91 that strengthened democratic institutions there and abandoned the KMT’s irredentist claims. Lee also formally recognized the legitimacy of Beijing’s rule over the mainland. It was in that same period that the two sides established unofficial organizations to open a channel for direct dialog and negotiations. It was also in this period that Taiwan began to insist that the two sides deal with each other as equals, and that reunification be effected through a three-step process to be concluded only when the two sides had achieved rough economic and political parity. Beijing never accepted these terms, nor any other conditions implying it had less than full sovereignty over Taiwan.
Taiwan’s authorities continue to insist that reunification is their eventual goal, but that in the interim, the mainland and the rest of the world should treat the two sides as separate, equal, and sovereign political entities. To that end, Taiwan over the past several years has tried by numerous means to gain wider and more formal recognition for itself, including: admission to multilateral organizations, especially those that admit only internationally recognized states; highly politicized international travel by its president and premier; and economic assistance and private investment often targeted to maximize political/diplomatic gains. None of these efforts has enjoyed measurable success. It has also tried on various occasions to refine the definition of its relations with the mainland (e.g., Lee’s comments in July) to create as much political space as possible between the two.
Beijing has refused to be moved from its one-China position, and no other country has realigned its China policy based on Taiwan’s definitions. Beijing profoundly distrusts Lee and believes he is seeking nothing less than a complete break from the mainland and international acceptance of Taiwan as a separate and fully independent state.
Whatever Lee’s longer-term intentions, an intractable contradiction exists between Beijing and Taipei regarding Taiwan’s current status. For Beijing, the only issue for consideration is formal resolution of its sovereignty over all of China’s territory, including Taiwan. This is so deeply ingrained in mainland consciousness after nearly two centuries of foreign colonization that it has taken on the trappings of a sacred mission, one that Beijing cannot abandon or negotiate away. Nevertheless, Beijing has promised complete autonomy for a Taiwan reunited with the mainland, including retention of its own armed forces, in exchange for Taiwan’s acceptance of PRC sovereignty. It has also signaled willingness not to force the issue, as long as Taiwan refrains from challenging the mainland’s sovereignty and seeking independence. However, it is precisely there that the fault line is located.
For Taipei, the issue is more complex. Although most (but not all) on Taiwan accept a cultural and linguistic affinity — even a strong bond — among people on both sides of the Strait, they are also painfully conscious of the discrepancies: a population one-sixtieth of the mainland’s; a per capita income 13 times larger than that on the mainland; a thriving, multi-party democracy vs. an autocracy that brooks no political competition. From the perspective of people on Taiwan the mainland presents a huge challenge which they cannot escape. Their great fear is that Taiwan will be swallowed up economically and politically. It will take years or even decades of further development on the mainland before their fears are assuaged. In the meantime, they are perforce consigned to a political and diplomatic “twilight zone,” neither country nor province. From their sense of vulnerability comes political support for maintaining “space” from the mainland which no political party in Taiwan can ignore. On the issue of separate political identities, the question in Taiwan is not yes or no, but how much and for how long.
From the standpoint of the U.S., this contradiction is also complex, and compelling. Acting in our own interests, we helped create the situation that obtains today. For the past 20 years, administrations of both parties have held steadfastly to a one-China policy, according full diplomatic recognition to Beijing while maintaining an unofficial but robust relationship with Taipei. By now our cultural and commercial ties to both sides of the Strait have grown strong. We are uneasy with the contradiction existing between the two sides and would like to see it “fixed” somehow, through our own efforts if all else fails.
At one extreme are those who see Taiwan as “the little engine that could” — an unmitigated political and economic success as measured by U.S. standards, one that deserves our full political and military support even at the expense of relations with the mainland, if necessary. At the other extreme are those who believe the support we are giving Taiwan now has already jeopardized our larger interests in the mainland, and we should thus adopt a “strict constructionist” interpretation of the three joint communiqués, even if this imperils Taiwan’s security.
The only argument for our strange, inelegant, and often disquieting China policy is that it has worked and served U.S. interests very well. On Taiwan, it created the conditions for the maturation of democratic institutions and a market economy. On the mainland, it ended the adversarial relationship between the U.S. and China, giving Beijing the sense of security it needed to unleash the forces of reform and opening. The past two decades mark the longest period of peace and political stability in China in two centuries and a growth of personal freedom and prosperity unrivaled in China’s entire history. In that period, China has also changed from a rogue state promoting world revolution, to a positive stabilizing force in the Asian region.
We may be forced to accept that for the time being that there are no simple, elegant solutions that will serve U.S. interests as well. We should continue to urge both sides to talk and to refrain from provocations. We should also continue to insist to both sides that any resolution must be peaceful. Like it or not, we may have to live with the status quo for some time to come.