Monday, April 29, 1996

If not China, Where?

Advocates in favor of economic cooperation with China have been urging Congress and Clinton Administration not to hold American trade policy hostage to our political agenda with China. Timothy Taylor's recent opinion piece on "Investing in Beijing" (Mercury News, 4/26/96) came to a similar conclusion but from a startlingly different perspective. Basically he said that the U.S. should go ahead and bash China on human rights and other issues because U.S.-China trade is not that important and American businesses have many other markets to pursue in lieu of China.

While he grudgingly admits that China is the biggest of the emerging markets, he suggests South Korea, India and Indonesia as major fall back markets should errant U.S. policy destroys any semblance of a relationship with China. What is the reality?

Korea has a population of 45 million compared to China's 1.2 billion. Office of U.S. Trade Representative considers Korea to be one of the most tightly controlled markets, far more closed than even Japan. Combined with the vast difference in population size, Korea is not in the same league as the potential of the China market. Multinational companies are going to China in droves to form joint ventures there; they have either pulled out of Korea or have given up trying to enter. Even the Korean companies recognize the relative maturity of their domestic market and have become highly aggressive investors in China.

India has many attractive considerations but is a newly recognized emerging market. The jury is still out on the extent foreign investments will be welcomed and the degree the market will be open to outside participation. According to the World Bank, while some 11% of China's population live in absolute poverty (i.e., without even enough food) in 1990, for the same year, more than half of India's population are in that category. Obviously, India's economy will have some catching up to do before it can be as attractive as the China market.

Indonesia is branded with the same alleged offenses as China, namely, corruption, human rights violations, and political uncertainty. The only significant difference is in the market size. Indonesian population is "only" 195 million. Indonesia will attract its share of foreign investments but again its potential is not large enough to take the place of China.

The simple truth of the matter is that the rest of Asia, the part that Taylor recommends as alternative markets to replace lost opportunities in China, are themselves leading investors in China. Taiwan has been the second largest investor in China and Singapore is fourth (in recent years, U.S. has been third). Thailand and Malaysia as well as Japan and Korea are all active investors there.

Conveniently overlooked by Taylor is that China received 41% of the $227 billion total foreign direct investments (FDI) made in Asia for the recent ten year period ending 1994. Furthermore, foreign investments in China show no signs of faltering. FDI in China for 1995 reached $38 billion which was approximately 12% higher than 1994. Obviously the working stiffs looking for business deals do not share his ivory tower perspective of pooh-poohing the importance of China.

Taylor suggested "agonizing over the importance of the Chinese market" as the cause of America's diplomatic inaction and ineffectiveness with China. That's incorrect. The U.S. diplomatic failure with China is due directly to its insistence in bundling their human rights and other geopolitical concerns with bilateral economic cooperation rather than working on a genuine diplomatic rapport where differences can be discussed and resolution attempted.

The lack of diplomatic effort towards China is conspicuous if one just count the number of visits Secretary of State Christopher has been to China since the beginning of this administration: once. President Clinton has met Boris Yeltsin ten times to date; he has only met Jiang Zeming three times during the same span and all were incidental to conferences of nations, none on a one-on-one basis.

Taylor's presumption that the Chinese government should not "get away with bad behavior" is unfortunately typical of the attitude that the American government has the duty (and right) to tell China what's wrong and what to do. William Overfelt is an American banker residing in Hongkong, known as a human rights activitist, who also wrote a book on the economic rise of China. He recently expressed concern that this very attitude is pushing the two sides toward "an utterly gratuitous second cold war."

It may be easy for Taylor to suggest that American businesses look elsewhere for fast growing markets. Boeing could hardly be as blasé about the $1.5 billion of orders for jetliners that China signed with the European Airbus recently. While four international and non-American consortia are competing for billion dollar contracts for the Three Gorges Dam, Caterpillar can only stand by the sidelines wistfully lamenting over $200 million of earth moving equipment business that they won't be getting for lack of U.S. government support.

In a sense, Taylor is quite right that the U.S. government should not factor the importance of China's economy into its diplomatic effort, but not because it would give the Chinese government more leverage. The reality is that it hasn't given the American side any leverage. Taylor is also sadly mistaken if he thinks what passes between U.S. and China now is any exercise in diplomacy.

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