Tuesday, November 30, 1993

MFN Means Trade, Not Human Rights

By George Koo and David Lam

President Clinton showed great statesmanship in pushing NAFTA through Congress. In meeting President Jiang Zemin of China at the recent APEC, the President showed wisdom in opting for dialog over confrontation. However, we believe that the most favored nation (MFN) status is not an effective carrot to exchange for a human rights concession from China. MFN is a trade issue and should remain so.

China has come a long way since the normalization of relations with the U.S. in 1979. It is now the world's top producer of coal, cement, grain, cotton, meat, and fish; third after Japan and the U.S. in steel and paper; fourth in power generation after the U.S., Japan, and Russia; fifth in crude oil output after the U.S., Saudi Arabia, Russia, and Iran. After adjusting for the real purchasing power, China's economy is now regarded as the third largest in the world by the International Monetary Fund, after only the U.S. and Japan. In 1992, China became Japan's second largest trading partner. Much of Japan's new investment has been diverted from North America to China. Just on the eve of APEC, German Chancellor, Helmut Kohl, led a high level delegation to Beijing to sign 17 contracts worth close to $3 billion, including 6 airbuses, a subway system in Guangzhou, and contracts covering power, steel, auto production, and machinery. Obviously, these two major world economies--Japan and Germany-- recognize the market in China and the value of the trade relations with China.

American companies, such as Campbell Soup, Coca Cola, Hewlett-Packard, IBM, McDonald's, Motorola, Proctor & Gamble, 3M, and Xerox, have also been important participants in China's economic boom---an economy that grew at a phenomenal annual rate of close to 10% for the last 15 years. Many smaller and lesser known U.S. companies are also there. American business needs China's market to grow, and China's economy needs American products and technology to continue to develop. Time and again, Chinese officials and entrepreneurs alike have privately expressed their preference for working with Americans. However, as long as the U.S. insists on subjecting China's MFN status to a yearly review and the vagaries of the political slings and arrows that go with the process, it will be difficult for American interests to make long term plans in China and for China to regard the U.S. as a dependable partner.

The purpose of MFN is to promote bilateral trade. Increase in bilateral trade means more jobs for both trading partners. MFN is not a dole, not a form of foreign aid, and not a subsidy, and the United States has MFN status with over 100 nations. In the case of China, because of the unfortunate Tiananmen incident in June 1989, the U.S. has elected to use a free trade promotion tool as a political weapon. Use of this weapon is not only inappropriate and ineffective in influencing China but also damaging to American economic interest.

History shows that individual freedom and improvement in human rights come with economic improvement and not by decree. Recent examples are Taiwan and South Korea where "free economy has led to free men," to quote Dr. Milton Friedman, Nobel Laureate economist. On the other hand, the veneer of democracy, in the absence of economic development, can lead to chaos and cause human misery. One need only look at Russia.

Chinese managers, as they listen to Western joint venture partners' ideas of managing an enterprise, are constantly exposed to Western concepts of egalitarianism; and Chinese entrepreneurs who think about business opportunities are inevitably developing independent thinking and questioning outdated methods. This doesn't mean, however, that the Chinese will necessarily embrace the American model of democracy and human rights.

No country's human rights conditions are without blemish. Even the U.S. has its Rodney King and Waco disasters, not to mention the ever pervasive threat of random violence. China and other Asian countries do not subscribe to the concept that only the U.S. knows how to implement policies relating to human rights. Developing nations like China must find their own way of dealing with human rights as their economy develops and an influential middle class emerges.

The use of MFN as a weapon detracts and undercuts U.S. trade negotiations with China. There are plenty of trade-related issues that the Clinton Administration needs to focus on, such as protection of intellectual property, market access, non-tariff barriers, investment guarantees, repatriation of profits, etc. These are properly within the confines of a most favored nation agreement, and their progress will help American business succeed in China. But if MFN has already been bartered for human rights concessions, U.S. influence would be diminished on critical trade-related issues that remain to be resolved.

Chancellor Kohl's recent trip to Beijing helped secure an order for six airbuses. That corresponds to a direct job loss for the six 747-400's that Boeing will not get to build for China. According to Boeing, that is nearly $1 billion in sales which would create or sustain 10,000 jobs for one year, of which 87% is resident in the U.S. President Clinton has articulated the need to stimulate export to revive the nation's post-cold-war economy and reduce unemployment. To that end, we need to treat MFN, a trade issue, as a trade issue.

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George Koo is Managing Director of International Strategic Alliances, Mountain View, California, a company established to assist American companies form cross-border alliances. He is also a member of the Executive Committee of Asian American Manufacturers Association and is the chairman of its annual conference.

David Lam is president and CEO of Expert Edge, Corp. of Palo Alto, California, a software developer. He also serves as a director of the Asian American Manufacturers Association and co-chair of Silicon Valley Global Trading Center. He recently spoke at the BRIE Technology Summit in Burlingame, California.

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