Getting China Wrong. Aaron L. Friedberg

cooperation.”⁴² Working through the General Agreement on Tariffs and Trade (the precursor to the WTO), from the late 1940s through the late 1970s the United States and its democratic allies in Europe and East Asia negotiated successive rounds of multilateral tariff reduction agreements. At the same time, a series of post-war technological advances, most notably the invention of containerized shipping, were increasing the speed and cutting the cost of long-distance transportation. These simultaneous changes in technology and policy enabled a dramatic increase in trade among the advanced industrial democracies.⁴³ Falling communications costs (due to the expanding capacity of transoceanic cables and the development of communications satellites) and a relaxation of controls on capital markets made possible an accompanying expansion in international financial flows.⁴⁴ As the Cold War entered its final decade, the advanced economies were being knit together more closely than at any time in nearly a century, causing Harvard Business School professor Theodore Levitt to coin a new term in 1983 when he declared that “the globalization of markets is at hand.”⁴⁵

      Starting in the mid-1980s, with the spread of the “Washington Consensus,” portions of the developing world began to be swept up in the globalizing trend as dozens of countries in Africa, Latin America, and parts of Asia “moved aggressively to export, open their markets, privatize, and deregulate.”⁴⁶ With the notable, but still partial, exception of China, the nations of the Communist bloc did not begin to follow suit until the collapse of the Soviet empire. This was a “world-historical watershed” after which “the rest of the Second World followed the Third” in attempting to implement market-oriented economic reforms.⁴⁷ Although the process was only starting to get underway, by the early 1990s the movement towards ever-closer economic integration appeared to have gained overwhelming momentum. For the first time since the eve of World War I, virtually the entire planet was being drawn together into a single global market.⁴⁸

The second era of globalization was different from the first in a number of respects, one of which is particularly relevant to understanding the subsequent evolution of Western policy towards China. Rapid advances in microelectronics, computers, and fiber-optic cables that began in the 1970s reached critical mass in the late 1980s and early 1990s, triggering the so-called “ICT (information and communication technology) revolution.” Among many other effects, the resulting, explosive growth in the volume and speed of data transmission, and the accompanying collapse in costs, created the conditions for an unprecedented shift in the structure of the global economy.

      According to economist Richard Baldwin, the ICT revolution “meant that manufacturing stages that previously had to be done within walking distance could be dispersed internationally without colossal losses in efficiency or timeliness.”⁴⁹ As Baldwin notes, “the international organization of production changed sometime between the mid-1980s and the mid-1990s,” with the year 1990 serving as “a convenient bookmark.”⁵⁰ Complex production processes could now be coordinated even after they had been broken into pieces and dispersed around the globe to places where the work could be done most cheaply. Large Western companies that mastered these techniques, relocating some of their activities to low-wage countries, were in a position to benefit greatly from the construction of “global value chains.”⁵¹ Provided that they had the necessary resources and adopted appropriate policies, so too were countries in the developing world. With its vast population and increasing openness to foreign investment, no country was better situated to benefit from these changes than China.

      Interests and influence

      As they entered the last decade of the twentieth century, American policy-makers believed that powerful historical tides were bearing their country, and the world, towards the safe harbor that their predecessors had long envisioned, but had never been able to reach. A truly global liberal democratic order was finally in sight. Some navigational adjustments would be required at times, to be sure, but the direction seemed set and the destination assured. A final factor that added ballast to this enterprise, helping to keep the ship of state on course, was the growing weight of commercial interests.

Unlike other participants in the network of multilateral trade agreements signed during the Cold War, China was not yet a full member in good standing of the US-led global trading system. The MFN status that it had been granted in 1980 meant that its exports were subject to the same low tariffs as those from most other US trading partners. But, in contrast to these countries, under the terms of the 1974 Jackson–Vanik amendment, China’s privileges, like those of the Soviet Union and other Communist bloc countries, were subject to annual review and could be revoked if a president judged that the CCP regime was abusing the rights of its citizens.

      Routine renewal of MFN status during the 1980s enabled increasing trade flows between the two countries.⁵² Slowly at first, American companies also began to invest directly in China, often establishing joint ventures in which they provided the money and know-how, while a local partner supplied cheap labor and helped navigate a dense thicket of rules and regulations.⁵³ Despite the growing appeal of such arrangements, the enthusiasm of American business executives was constrained by their awareness of lingering political risk. If for some reason relations soured and Beijing lost its favored status, Chinese exports, including those made in American-owned factories, would suddenly face prohibitively high tariffs. Once-profitable investments could then become costly liabilities almost overnight.

      The Tiananmen Square massacre and its aftermath brought these fears to the fore. But they also served to mobilize and solidify a powerful coalition of business groups that successfully fended off immediate threats to their interests and, in the process, helped to transform economic engagement into the central pillar of post-Cold War US China strategy. In response to the bloodshed in Beijing, the George H.W. Bush administration imposed limited sanctions and suspended the sale of arms and some sensitive dual-use technologies, but it resisted Congressional pressure either to revoke China’s MFN status or to impose conditions for its renewal.⁵⁴ Having criticized his predecessor for being soft on “the butchers of Beijing,” in May 1993 newly elected President Bill Clinton decided to take a different tack, renewing China’s status but issuing an executive order demanding that it make “significant progress” on human rights if it wished to retain its trade privileges. One year later, however, despite Beijing’s rejection of his demands, Clinton reversed course and restored China’s status without condition or the threat of further review.

The most important cause of this consequential decision was the unprecedentedly intense and well-organized pressure brought to bear on Congress and the White House by substantial swaths of the American business community. Three aspects of this campaign deserve special note. First and perhaps most obvious is its sheer breadth and diversity. By one count, by the spring of 1994, “nearly 800 major companies and trade associations” were involved in what was described at the time as one of the “largest lobbying efforts ever” mounted by American business.⁵⁵ Among those taking part were corporate giants from across a range of sectors, including aerospace (Boeing, Hughes, Lockheed, and McDonnell Douglas), the automotive industry (Ford, Chrysler, and General Motors), energy (Exxon), electrical machinery (Westinghouse and General Electric), electronics (Motorola and Intel), and food processing (Coca-Cola, Pepsi, and McDonald’s).⁵⁶ These firms were joined by major lobbying groups like the National Association of Manufacturers, as well as associations representing smaller industries and enterprises, including everything from wheat farmers and footwear retailers to the manufacturers of fertilizer. The views of the financial industry also received a sympathetic hearing inside the Clinton administration, thanks in part to the creation in 1993 of a new National Economic Council headed by former Goldman Sachs executive Robert Rubin.⁵⁷

      A second notable aspect of the effort to protect China’s MFN status was its forward-looking, speculative quality. For many of those involved, support for delinking MFN status from human rights was driven less by the reality of present earnings than by the alluring promise of future profits. China was important and getting more so, but it was nowhere near the goldmine that many hoped it would someday become. Despite an upward trend during the 1980s, on the eve of Tiananmen the value of the United States’ exports to China still accounted for just 1.6% of its total exports.⁵⁸