Engagement Is Working

September 1, 2004 • Commentary
This article was published in Apple Daily (Hong Kong), September 1, 2004.

China’s economy has grown precisely because Beijing has allowed greater economic freedom. Between 1980 and 2002, China’s economic freedom rating increased from 3.8 to 5.7 (with 10 being the highest score), according to the Economic Freedom of the Word 2004 Annual Report. The rise would be even more impressive, however, if one focused on the coastal provinces, such as Fujian, Guangdong, and Zhejiang, which are highly market‐​oriented. Moreover, the current index score of 5.7 does not recognize the liberalization that has occurred in China since 2002, including the recent amendment to the Constitution that gives greater protection to private property rights.

Trade liberalization has linked China to the international price system, dramatically increased per capita incomes, and provided the Chinese people with new opportunities. In contrast to 1978, when the central government had tight control over foreign trading rights, today virtually all firms are free to import and export.

The growth of China’s foreign trade has been breathtaking. In 1978 the total value of Chinese imports and exports amounted to only $20.6 billion. By the end of 2003, their value had increased to $851.2 billion — nearly 62 percent of GDP, making China one of the most open economies in the world.

Protectionists in the United States who point to large and growing trade deficits with China and to increased U.S. investment in China should not be allowed to block trade liberalization by injudicious use of national security and human rights arguments. Further liberalization of U.S.-China trade is a win‐​win strategy and can play an important role in promoting peace and prosperity. Containment would do the opposite.

The U.S.-China Commission’s 2002 report “The National Security Implications of the Economic Relationship between the United States and China” offered more than 40 recommendations, many of which implicitly assume that China is a threat to U.S. economic and military power. The 2004 report, however, dropped many of the more onerous recommendations, such as the creation of a “federally mandated corporate reporting system,” designed to force U.S. firms doing business in China to provide extensive data on all their business activities, even those that have no significant impact on national security. Nevertheless, the latest report continues to perceive the large U.S. trade deficit with China–a record $124 billion in 2003–as a threat to the U.S. economy, especially to the manufacturing sector, and hence to national security.

The main premise of the 2004 report, like the earlier report, is that economic liberalization has not led to political change or to greater openness, and that China’s rapid growth poses a danger to U.S. security. To counter that threat, the commission favors restricting access to U.S. capital markets, invoking WTO safeguards to limit imports of selected manufacturing goods such as textiles, and pressuring China to revalue its currency.

China should be given ample time to meet its obligations to the WTO and to the United States under the 1999 bilateral market access agreement. The United States should work through the WTO dispute resolution mechanism and target specific cases that are significant rather than try to prosecute every infraction of the trade agreement. It is in the interests of both Washington and Beijing to open China’s markets.

The United States should follow the lead of New Zealand and other countries and extend market economy status to China as soon as possible. The use of production costs in surrogate countries to determine whether China sold at below “cost” is highly questionable. Indeed, the non‐​market economy methodology used in antidumping cases is grossly defective and prevents China from realizing its legitimate comparative cost advantage. (The United States and European Union recognize Russia as a market economy, even though that country began economic reform much later than China and has a lower economic freedom rating.)

Congress should not let protectionist interests dominate future U.S.-China relations. The USCC reports send the wrong signal to policymakers. Instead of seeing China as a threat, Congress needs to cooperate with China in ways that are mutually beneficial. It is in China’s interest to deepen and extend economic reform by opening its capital markets and allowing full convertibility of the yuan. The threat of U.S. sanctions if China fails to do so will only antagonize China and harm U.S.-China relations.

About the Author
James A. Dorn

Vice President for Monetary Studies, Senior Fellow, and Editor of Cato Journal