Next Great Market Or Evil Empire?

On the eve of President Clinton's state visit to Beijing, the United States seems to have a two-China policy.

First, there's the China that's one of the world's fastest-growing economies, a nation that offers U.S. companies and investors great opportunities for high returns and that has shown it can be a responsible trading partner by resisting pressures to devalue its currency.

CBS.com reports on President Clinton's trip to China

President Clinton will visit both Chinas in the next 10 days. He'll talk to young entrepreneurs, but he'll also speak out firmly on human rights. He'll try to pry Chinese markets open to U.S. goods, but he'll also praise the Chinese for doing their part to stabilize an economically troubled region. He'll help U.S. businesses close some more deals, but he'll firmly deny that he's in the pocket of U.S. business or the Chinese military.

Different This Time
The controversy over economic policy with China is different this time. President Clinton is the first American president to face accusations that he took campaign money from the Chinese military and then allowed satellite and missile technology to be exported to China through a U.S. company, Loral Space and Communications, whose chairman is the largest single donor to the Democratic Party.

The satellite deal is being investigated by Congress. Lawmakers have pushed dozens of measures to punish China. The House passed an embarrassing but non-binding resolution calling on President Clinton to stay out of Tiananmen Square, where China's army gunned down hundreds of pro-democracy demonstrators in 1989. President Clinton has renewed China's most-favored nation trading status, which Congress can block if it can get a veto-proof majority.

"Are we supposed to turn our head and look the other way just for the almighty dollar?" asked Rep. Dan Burton, R-Ind. Even the Democrats' House minority leader has been critical. "America must stand for more than money," said Rep. Dick Gephardt, D-Mo.

President Clinton hasn't shied away from the controversy. "I'm going because I think it's the right thing to do for our country," he said in a June 11 speech. His aides back him up.

"We have found that we have made more progress by looking them in the eye and telling them strongly and firmly what we believe," said National Security Adviser Sandy Berger at a White House briefing.

Containing The Contagion
Washington's immediate economic concern is containing the economic meltdown in the region. So far, Chna has done everything that's been asked.

"It has contributed substantial amounts of money, both multilaterally and bilaterally," said Nick Lardy, a China specialist at the Brookings Institution in Washington. "And more importantly, it has contributed by suggesting that it will maintain the stability of its exchange rate."

Some economists think China may have set off the Asian crisis by devaluing the yuan in 1994, giving its own goods a competitive advantage over goods produced elsewhere in the region. Over time, Indonesia, Thailand, and Malaysia were pressured to revalue their own currencies and when they did so, their economies tanked as investors fled.

China is under similar pressure now to devalue the yuan to regain its competitive advantage. But Beijing has so far made good on its promise to leave the yuan where it is. Last week, Chinese officials called on Japan to boost its economy and hinted that the yuan might have to be devalued if Japan didn't act soon.

The value of the yuan will be at the heart of the discussions Treasury Secretary Robert Rubin has with his Chinese counterparts during the summit.

"It would not be difficult to envisage a severe bout of global financial turmoil if China were to devalue - with Hong Kong, Russia, and Latin America next in line," said Sherry Cooper, chief economist at Nesbitt Burns.

Trade Gap
China's goods are already extremely attractive to U.S. consumers, even without a devaluation. The trade gap with China has ballooned to $15.8 billion in the first four months of 1998 as imports have grown 18 percent to $20.1 billion. Exports to China have grown 11.8 percent to $4.3 billion over a year earlier.

"Although there is a deficit in our trade with China, it is vastly overstated by the U.S. Department of Commerce," said Brookings' Lardy.

He says most exports to China are in high-tech industries with high wages, while Chinese imports are in low-wage sectors like apparel and toys. Chinese imports have largely grown at the expense of its neighbors like Hong Kong, Taiwan, and South Korea, Lardy said.

Nevertheless, U.S. officials will be trying to force China to open more markets. "There has not been a level playing field in China," said Commerce Secretary William Daley.

Other Issues
Some sticking points in the U.S.-China relationship have improved. "There has been progress in some areas," said Gene Sperling, President Clinton's top economic adviser, pointing to effective crackdowns on pirate factories that make unauthorized software, videos, and CDs.

On the Chinese side, membership in the World Trade Organization is a top priority. But the United States and other industrialized nations have refused China's request until it complete reforms of its economy and removes tariffs and other barriers to free trade.

A breakthrough on WTO is unlikely, Lardy said. Lardy warned that the United States should go cautiously on demand that China open its financial system to the outside, considering the damage down by premature liberalization elsewhere in Asia. Pushing liberalization before regulatory structures are in place "is pushing them off a cliff," Lardy said.

Lardy said the tough stance by the Americans could sour the Chinese on the WTO altogether, a dangerous prospect for the world's eighth-largest trading nation.

U.S. Trade Representative Charlene Barshefsky came away empty handed from a weekend meeting with Trade Minister Shi Guangsheng, complaining that promises to open the services sector did not go far enough.

Written By Rex Nutting