China Reacts to US Trade Decision

MOST-FAVORED-NATION STATUS

CHINA'S battle to avert a major shock to its economy will not end with President Bush's recommendation to Congress that Beijing retain most-favored-nation (MFN) trade status. The White House go-ahead, expected yesterday, would be in keeping with Mr. Bush's policy of maintaining ties with China's hard-line regime while softly criticizing its human rights abuses.

But as Congress debates the renewal of MFN status, opposition remains strong. Congressional critics say Bush's lenient China policy has failed to soften the iron-fisted rule imposed after the Tiananmen Square crackdown last June 3 and 4.

The defiant tone of China's official propaganda suggests that despite high economic stakes, Communist Party leaders are unprepared to significantly ease their repressive control to meet congressional demands.

While refraining from harsh threats, Beijing has warned that Sino-American relations will face a ``major setback'' if Washington revokes MFN treatment. Retaliation, Chinese officials say, is certain.

``The Chinese government ... will take compensating measures'' against US companies doing business with China, says Zheng Hongye, chairman of the China Council for the Promotion of International Trade.

``The Chinese people are not a lump of bean curd,'' Mr. Zheng added.

Some Western analysts say that revoking MFN status could undermine Chinese advocates of market-oriented economic reform and democratization. Moreover, it could enhance the power of party conservatives who gained influence after crushing last spring's democracy movement, they say.

``The revocation of MFN would not be an asset to people who support a more liberal policy,'' says Nicholas Lardy, an expert on the Chinese economy at the University of Washington.

Conservatives ammunition

Party conservatives could use the cancellation of MFN status as further ammunition against reformers, led by Zhao Ziyang, former party chief, who have pioneered the export-led growth strategy in China's coastal regions since the mid-1980s.

Conservatives, who have revived Maoist calls for economic self-reliance, may point to the loss of MFN tariffs as an example of the dangers of opening China's door too widely to foreign trade and investment.

Without access to the lowest available tariffs the US offers most trading partners, the average tax on Chinese imports would rise to 50.5 percent from the current 9 percent, according to the US-China Business Council.

As a result, China could lose $6 billion to $10 billion a year in sales to the US, or up to a fifth of China's total exports last year of $52.5 billion.

Dynamic, export-oriented coastal companies would be hardest hit by the lifting of the preferential US tariffs, Chinese officials say. Many of the companies are small, private, or collectively run rural enterprises, which produced a fifth of China's exports last year.

``In the coastal areas, particularly in the southeast, many enterprises that are export-oriented will suffer quite a lot,'' says Mr. Zheng, who represents 7,800 Chinese companies and trading companies.

The revocation of MFN status would also give conservatives an opportunity to shift the blame to the US for China's economic stagnation from their 20-month-old austerity policy.

``The rhetoric will be very harsh,'' a US official says.

Party propagandists have already accused the West of aggravating China's economic slump by restricting trade and withholding loans after the June crackdown.

Sino economy threatened

Western economists predict that the withdrawal of MFN status would inflict serious damage on the Chinese economy.

China's exports to the US constitute only about 2 to 3 percent of China's annual gross national product. However, those exports are ``one of the most important engines of growth of the Chinese economy,'' a US official says.

The US, China's third largest trading partner, is by far the fastest growing market for Chinese products. China exported $12 billion worth of goods to the US last year, a 43 percent hike over 1988. In the first quarter of this year, the exports increased 50 percent, US statistics indicate.

The revocation of MFN status would halt that export growth, depriving China of billions of dollars needed to import technology to modernize its economy. China would also lose investment from US and other foreign companies, which would no longer see the country as an attractive base for producing goods for sale abroad, Western economists say.

The shock of a sudden drop in trade would also exacerbate China's sluggish industrial growth, rising unemployment rate, and difficulty in repaying its $41 billion foreign debt.

``MFN would compound their problems,'' Professor Lardy says.

Facing slack domestic consumption and saturated markets in Western Europe and Japan, many Chinese factories that export to the US will be forced to shut down or slow production overnight if MFN status ends, US officials say.

Millions of Chinese jobs, especially in the apparel, toys, and electronics industries, could be lost in addition to the record unemployment already officially forecast for this year.

At the Beijing No. 2 Cotton Mill, for example, director Zhang Youfu says he would immediately halt production of cotton and other cloth for the US market, which absorbed a third of his factory's $40 million in exports last year. ``We would definitely suffer,'' Mr. Zhang says.

Zhang, whose factory is state-run, says he wouldn't fire workers. Instead, he would cut wages across the board for the factory's 9,000 employees.

Despite their own gripes against the Communist regime, Chinese workers accustomed to the state's ``iron rice bowl'' say they oppose the US effort to penalize China for human rights abuses by ending MFN status.

``Of course we hope it won't happen,'' says Wang Jiesheng, a spinning machine worker at the No. 2 Cotton Mill. Workers at the mill are ``worried'' about the possible impact on wages, she says.

Nevertheless, some liberal Chinese students and intellectuals support an end to the favored trade status as a way to deepen China's economic recession, speed the fall of the hard-line regime, and spur democratic change.

``To mobilize the masses of Chinese people one does not use the brain, but the stomach,'' a Chinese scholar says.