U.S. Think Tanks and Economic and Trade Policy to China

Abstract

As an emerging power, China’s rise causes high attention among U.S. think tanks, which have strengthened their research on China from different perspectives, including politics, economy, military, society, and foreign relations. A large majority of think tanks have involved in discussion and formulation of U.S. trade policy toward China, ranging from China’s most-favored-nation (MFN) trade status, permanent normal trade relations (PNTR), and U.S. economic and trade policy toward China in the new century.

3.1 Ways of Think Tanks Influencing U.S. Economic and Trade Policy to China

As an emerging power, China’s rise causes high attention among U.S. think tanks, which have strengthened their research on China from different perspectives, including politics, economy, military, society, and foreign relations. A large majority of think tanks have involved in discussion and formulation of U.S. trade policy toward China, ranging from China’s most-favored-nation (MFN) trade status, permanent normal trade relations (PNTR), and U.S. economic and trade policy toward China in the new century. Besides the CFR, the Brookings, the Carnegie, the RAND, the Heritage Foundation, the AEI, the CSIS and the Atlantic Council, the Peterson Institute of International Economics (PIIE) and the Economic Policy Institute (EPI) have played a special role.

As the only major research institution in the United States devoted to international economic issues and a nonprofit/nonpartisan research institution, the PIIE was established by Fred Bergsten in 1981. Bergsten once served as Assistant Secretary for International Affairs at the U.S. Department of Treasury. The institute “attempts to anticipate emerging issues and to be ready with practical ideas, presented in useful and accessible formats, to inform and shape public debate.”¹ Its audience includes government officials and legislators, business and labor leaders, management and staff at international organizations, university-based scholars and their students, experts at other research institutions and nongovernmental organizations, the media, and the public at large.² Over the past thirty plus years, the institute has provided many international economic policy initiatives, such as the reform of International Monetary Foundation (IMF), the proposal of G20, broader financial management reform, the world’s currency exchange rate systems, U.S. dollar, Euro, the Renminbi (RMB, Chinese yuan) policy, and global account imbalances. The PIIE has made significant contributions to a diverse array of important trade issues, such as the Uruguay Round, Doha Round negotiations, North American Free Trade Agreement and some other U.S. free trade agreements, APEC, East Asian regionalism, initiation and implementation of U.S.-China Strategic and Economic Dialogue, U.S.-Japan economic negotiations, sanctions policy reform, U.S. export controls and export credit relaxation, and some other specific issues like China’s PNTR trade status in 2000 and import protection for iron and steel. The institute produces in-depth articles, policy briefs and working papers. It also holds various kinds of dinner parties, seminars or conferences to discuss international economy every week.

There is around 50 staff at the PIIE and most of them are famous in the United States and beyond. Notable experts on Chinese economy include Fred Bergsten, Morris Goldstein, and Nicholas Lardy. The founding director of the PIIE (formerly the Institute for International Economics, IIE) Bergsten is widely quoted, and frequently appears at hearings before Congress and on TV. He was cited as number 37 of the top 50 “Who Really Moves the Markets?” and as “one of the ten people who can change your life” by USA Today.³ Things as such can well illustrate Bergsten’s influence in American society.

Bergsten has authored, coauthored, edited or coedited more than 40 books on international economic issues, including The Long-Term International Economic Position of the United States (1999),⁴ China’s Rise: Challenges and Opportunities (2008),⁵ and The United States and the World Economy: Foreign Economic Policy for the Next Decade (2005).⁶ It is with no doubt that Bergsten’s remarks on global currency, China’s currency exchange rates, and global economic imbalance have affected American views on issues of Chinese economy and trade and the RMB exchange rates.

Nicholas Lardy once worked at the Brookings Institution from 1995 on and joined the PIIE in 2003. As a well-recognized expert on Chinese economy, Lardy writes a wide range of books and articles regarding Chinese economy. His publications include “The Future of China’s Exchange Rate Policy,”⁷ and China’s Rise: Challenges and Opportunities (co-authored with Fred Bergsten). Lardy is one of the most influential U.S. scholars specializing in Chinese economy.⁸

The EPI is another influential think tank that cannot be ignored with reference to U.S. economic and trade policy to China. According to the introduction of the institute on its website, the EPI was created in 1986 and “proposes public policies that protect and improve the economic conditions of low- and middle-income workers and assesses policies with respect to how they affect those workers.”⁹ The institute has close ties with U.S. labor unions although it claims that it is a nonprofit and nonpartisan think tank. In 2008 through 2010, a majority of its funding (about 58%) was in the form of foundation grants, while another 26% came from labor unions.¹⁰ The EPI “produces numerous research papers and policy analyses; sponsors conferences and seminars; briefs policy makers at all levels of government; provides technical support to national, state, and local constituency and advocacy organizations; testifies before national, state, and local legislatures; and provides information and background to the media.” In a typical year, the EPI is cited in the media more than 20,000 times and is mentioned and/or its staff are seen or heard by over 300 million people on television and radio.”¹¹ The institute is inclined to oppose free trade in matter of economic and trade issues. It believes that free trade causes job losses in the United States and proposes to protect domestic industry. The EPI takes a hard line with China concerning trade issues. It argues that China infringes intellectual property rights and manipulates its currency, which is thought as a major cause of the rapidly growing U.S. trade deficit with China. This will then lead to the loss of a huge quantity of job opportunities. Therefore the EPI persists in advocating imposing more pressure on China and suggests ranking China as the largest currency manipulator. These policy recommendations are quite influential in Washington, DC, particularly among Democratic politicians. Charles Schumer, a Democrat Senator and long-term hardliner on the issue of the RMB currency, addressed the creation of jobs domestically at the EPI in July 2011.

Think tanks cannot get involved in government decision making directly. Rather, they usually play an indirect role. At most of the time think tanks play their part behind the scenes in imperceptible ways. It is more appropriate to say that it is the viewpoints of some individual researchers rather than a whole think tank that are often heard. Researchers often emphasize that their personal viewpoints on some issues do not represent that of institutions they serve, particularly when the institution per se remains divided on these issues. By and large, there are no special differences between major U.S. think tanks regarding ways they influence American economic and trade policy toward China.

Think tanks’ first step is to decide issue and find out problems or challenges. Through research and discussions, they then provide policy ideas and resolution plans. In order to obtain support from the public and find favor in policy makers’ eyes, think tanks double their efforts to publicize and “sell” these ideas. The trading volume between China and the United States has been constantly increasing and interdependence is deepening after the establishment of their diplomatic relations. In spite of the fact that structural discrepancies remain unsettled and the fluctuating relations influenced their economic and trade ties, the overall development trajectory is still quite fast. The issue of MFN trade status had been highly politicized and became an eye-catching topic in the 1990s. Nearly all think tanks at different time voiced their positions on this issue. Think tanks highly concentrated on and ardently discussed some important issues, ranging from MFN and PNTR status, China’s entry to the WTO, debates over RMB exchange rates caused by trade deficit, to intellectual property protection and market access. In fact, this is an interactive process. In the context of China’s rapid development, the United States cares more about the implications of China’s rise. Besides, U.S. subprime mortgage and financial crisis adds American’s concern to trade deficit and trade imbalance between the United States and China, which encourage think tanks to do research on these issues. In turn, think tanks select and shape research issues and detect problems and challenges that will attract attention from both the media and the public.

One of the most important roles that think tanks play is to produce innovative research findings and thought products, influence public opinion, expand social influence, and shape a favorable social environment for U.S. foreign policy. As American political scientist Donald Abelson once put, while individual scholar sometimes clearly supports or opposes governmental policies, the institution he or she affiliated with has its primary goal to serve as an important source providing professional knowledge rather than involving in policymaking process.¹² First, think tanks publish a multiplicity of books and journals, analytical reports and background information. Major think tanks have their own journals, such as Foreign Affairs, The National Interest, Foreign Policy, Washington Quarterly, Brooking Review, and RAND Review. These journals are popular to government officials and researchers. Second, think tanks periodically host public seminars, lectures, and symposiums. They discuss important issues, particularly those attractive to the public. This is actually a way to educate the public and influence the media. Third, think tanks expand the social influences of their research findings via the media and press. Think-tank researchers accept interviews by mainstream media and express their viewpoints on some issues. They hold briefings to expound their positions and proposals from time to time.

Think tanks aim at influencing public policy. To achieve this important goal, they need to strengthen ties with the government. Specifically, there are various ways think tanks usually adopt. They can participate in concrete consulting-oriented research projects with the government; submit the latest research findings to it by raising questions and providing resolutions; invite government staffs to have informal meetings and discussions or to give lectures at think tanks so as to deepen mutual understanding and communications; testify at hearings before Congress and enunciate positions and viewpoints on relevant issues to affect congressional opinions. Think tanks’ influence varies from issue to issue. For example, think tanks have their voices heard concerning RMB exchange rates. Among them the PIIC is the major player. Its founding director Fred Bergsten gave testimonies at hearings before Congress regarding issues of reforming the international monetary system, U.S. trade deficit with China, and RMB currency exchange rates. He argues that the Chinese government blocked significant RMB rise and proposes putting more pressures on China.¹³ The institute’s senior fellow Morris Goldstein and Nicholas Lardy also appeared at hearings before Congress, elaborating the issue of undervaluation of Chinese currency. In 2003, at a hearing before the Senate Subcommittee on Domestic and International Monetary Policy, Trade, and Technology, Goldstein presented preliminary estimates, arguing the RMB is undervalued by 15–25%. He then put forward a two-step approach for China to consider. “In the first step, China would immediately revalue the RMB by 15–25%,” and in the second step adapt a managed float.¹⁴ The Bush administration did impose pressures on China as Bergsten proposed, as indicated by U.S. China policy years later.

Think tanks provide policy support or campaign strategies for presidential candidates so as to pave the way for influencing the new administration. One example is Bill Clinton and the Center for American Progress (CAP). The CAP was once called the Institute of American Progressive Policy affiliated with the Democratic Leadership Council, established in 1989. Bill Clinton maintained a close relationship with the institute when he served as Democratic National Committee Chair. After he began to run for president, many key members of the CAP were included in his campaign team. John Podesta, the first president and CEO of the CAP, was appointed as Director of the White House Office after Clinton came to office. Because of their close ties, the center was once regarded as Clinton’s personal think tank. Key members of the CAP also participated in Barack Obama’s campaign team in the 2008 presidential election, providing policy recommendations, including campaign tactics and post-election policy adjustments. The center is therefore highly recognized by President Obama and its several fellows were appointed as high-level officials in the new administration. Thanks to President Obama’s trust and support, a wide array of its research reports and policy recommendations were highly valued and adopted.¹⁵ There are also some typical cases for Republican Party. The Heritage Foundation played a significant role behind the scenes in the 1980 presidential campaign. It assisted the Reagan administration to handle transition affairs. George W. Bush mainly relied on the Hoover Institution at Stanford University during his campaign. Condoleezza Rice at the institution was later appointed as Assistant to the President for National Security Affairs.

The “Revolving Door” effect further expands the space of think tanks to influence public policy and helps to cultivate reserves of talents. The flow of personnel is a two-way process: research fellows at think tanks assume important positions at government agencies while retired or resigned government officials enter think tanks and serve as executives or senior fellows. There are a great number of cases of two-way personnel flow. Some people even shuttle between government and think tanks for many times. Jeffrey Bader once served as State Department’s Director of Office of Chinese and Mongolia Affairs during the second term of the Clinton administration. As Clinton left the White House, Bader left the government and started to work as senior fellow at the Brookings, serving as director of the China Initiative and the first director of the John L. Thornton China Center. When Democrat Obama ran for presidential campaign, Bader served as the advisor to him on foreign policy. When Obama took office in 2009, Bader returned to the White House and served as Senior Director of Asian-Pacific Affairs at the National Security Council until April 2011.¹⁶ Those who came back to think tanks have a clearer knowledge of the features of governmental policymaking and can wage their influence and manage with ease that novices cannot through their personal networks with governmental agencies and Capitol Hill. On the one hand, government officials are more willing to seek consults from former officials, due to private relations and psychological reliance. On the other, these former officials, particularly heavyweight ones, build a communication bridge between think tanks and government agencies, therefore advance the influence of think tanks. This is why a large number of think tanks attach great importance to the incorporation of former government officials into their research or managerial teams.

Furthermore, U.S. think tanks take an active part in track II diplomacy directly. By strengthening communications and exchange, they can understand perceptions of China better and provide American government with more accurate information. Considering the complexities of U.S.-China relations and the lack of strategic mutual trust, think tanks through track II dialogue can communicate and negotiate about some sensitive and controversial issues. The channel of communications facilitates mutual understanding, expands space of cooperation, and helps to conduct resolutions. Track II dialogue provide not only precise intellectual support, but also the warming up phase leading official diplomatic activities, making it a necessary supplementary element. Thanks to their special functions, think tanks receive high recognition and are appreciated by U.S. government. Before enacting an important policy, the government will listen to viewpoints from some think tanks and test the waters through their activities. In fact, U.S. government often conveys some signals through think tanks so as to observe reactions from inside and outside the United States and get well prepared for the introduction of some important policies. In this sense, research and discussions by think tanks pave the way for the making and explanation of U.S. economic and trade policy toward China. By doing this, domestic pressures in America can be released and the United States can also deliver messages to China. The Brookings made some suggestions for the revision of Deputy Secretary of State Robert Zoellick’s speech transcript before he formally put forward the concept of “responsible stakeholder” in September 2005. The new concept attracted attention from many parties. Different people and institutions had their own interpretations. The Brookings dispatched its research fellows to China and listened to Beijing’s feedback about it. Actually, major think tanks such as the Brookings, the RAND, and the CSIS frequently promote and devise track II activities, thus becoming the backstage planners for U.S. China policy.¹⁷

Think tanks’ influence varies from one another and is contingent upon a wide range of factors. First, ideas and beliefs of think tanks must match with cultural values of American society. Otherwise they will not have influence and lost their vitality. American society is open and inclusive, but with some basic bottom lines in value. Think tanks would find it difficult to survive should they challenge values that are widely accepted by the society. A large amount of funds and grants come from donations of individuals and foundations. Think tanks can hardly obtain funds that are essential to their survival once their basic positions are not acceptable by the society.

Second, while think tanks emphasize their independence and are not affiliated with any parties or interest groups, they are generally different from one another in ideological terms. American Think tanks can be divided into three spectrums, namely, left, center and right. This will affect their influence in certain periods. The Heritage Foundation and the AEI are homes to American conservatives. They both maintain a quite close relationship with the Republicans. Comparatively, these think tanks that bring conservatives together are more influential to a Republican administration than a Democratic one. The AEI and the Heritage Foundation are more influential under the administrations of Ronald Reagan and George W. Bush. In contrast, the Brookings and the CAP are more liberal, and more likely to win favor from a Democratic administration. This explains that why the CAP has more influence on U.S. policies during the Clinton and Obama administrations, when the AEI and the Heritage Foundation have smaller influence.¹⁸ But it does not mean the latter ones have no influence at all. Rather, they can still constrain the Democratic administrations by influencing the Republican Party and working with other conservative think tanks.

Third, think tanks constitute only one of many factors influencing U.S. China policy, and their role should not be exaggerated. In the era of the post-Cold War, U.S. China policy is closely related with domestic political struggles. A distinct characteristic running through the 1990s is the politicization of U.S. economic and trade policy toward China, which remains so today. Due to the close relations between economic issues and interests of American domestic interest groups, all sorts of political forces—administration departments, House and Senate, interest groups, the media, as well as inter-partisan and factional conflicts on the part of the Democrats and Republicans—are involved in intense contentions with one another. Therefore, U.S. economic policy toward China seems to be the final result after many rounds of contentions among relevant forces. Under these circumstances, it is not easy to accurately evaluate the role think tanks play in making U.S. economic and trade policy toward China.

The next sections will explore the role of think tanks in policymaking on three issues, China’s MFN trade status, PNTR status, and U.S.-China economic and trade relations since 2000.

3.2 Think Tanks and China’s MFN Status in the 1990s

Debates over China’s MFN trade status have been a point at issue for U.S.-China relations as well as U.S. Congress and administration contention after 1989. In the ten-year-long struggle around China’s MFN status, members of Congress put forward many resolutions and proposals and a variety of interest groups were involved in the process. Think tanks also had their voices heard in the seesaw battle.

3.2.1 The Prominence of China MFN Issue

According to the Jackson-Vanik Amendment to the Trade Act of 1974, two prerequisites should be met if a country wants to receive MFN status with the United States. First, the country must conclude a reciprocal agreement on granting MFN status mutually with U.S. government and the agreement must be passed in Congress. Second, the country should entitle its citizens to emigrate.¹⁹ If U.S. President agrees and Congress does not oppose or cannot overturn presidential veto by two-thirds majority, a specific country’s MFN trade status would be extended for a year. The amendment was formulated specifically for the Soviet Union. It is self-evident that the MFN issue was a product of the Cold War. But the issue continued to affect U.S. relations with other countries in the post-Cold War era. Since the Jackson-Vanik Amendment could be applied to all non-market economies, China and its socialist counterparts were bounded and restricted by the amendment when they signed trade treaties with the United States. Through the 1980s, the renewal of China’s MFN status was not a problem. Previous U.S. administrations would notify Congress every year that China should be exempted from the prerequisites required by the Jackson-Vanik Amendment before the MFN trade status was due. China’s MFN status was successfully extended because Congress never opposed it until 1989.

Public opinion was unfavorable to China after the June Fourth Incident in 1989. Anti-Chinese sentiment overwhelmed U.S. Congress. Members of Congress put forward a wide array of resolutions demanding the administration to impose sanctions against China. Considering the realities and U.S. national interests, President George Bush adopted some measures that would prevent U.S.-China relations from breaking down. He also took actions to mend the relations between the two countries before Congress was about to impose sanctions against China.²⁰

The Bush administration and Congress held totally different positions on sanctions against China during that period. In brief, the administration was mild and restrained, while Congress was strong and tough. The Bush administration handled with U.S.-China relations in a way that was consistent with the long-term American interests. It adopted measures of sanctions against China with different stages and adjusted its specific measures according to the domestic situations in both the United States and China, being cautious on sanctions against China to avoid severely damage on U.S.-China relations by extreme measures. Many members of Congress, however, became quite emotional, strongly arguing that Congress should impose more severe and broader sanctions against China and exert greater pressure so that China could make concessions.

As the different positions between Congress and the administration on U.S. China policy were widening, Congress choose to challenge the President during annual review of MFN status, attempting to exert pressure on the Chinese government and forced the White House to adopt a tougher China policy. The MFN issue, which had never been an issue, turned out to be a focus of struggle.

The withdrawal of the MFN status to China would result in the imposition of substantially higher U.S. tariff on over 95% of U.S. imports from China.²¹ According to a statistical report by the White House in 1990, over twenty main products—such as shoes, clothes, electronic products, and toys—that China exports to US would be imposed a 60% tariff rate should China’s MFN trade status be revoked. Some other goods would even be imposed tariffs ten times more.²² It seemed that the United States placed an embargo on Chinese products. Besides, the United States granted MFN trade status to a vast majority of economies and denied the status to just few countries, which were nearly regarded as U.S. enemies.²³ Therefore, withdrawing China’s MFN status in some sense made Beijing an enemy of Washington. Representative James Moran of Virginia once mentioned about the consequences of rejecting renewal of China’s MFN status. “A vote to reject normal trade relations sends a signal to China that we consider them an enemy in the same way that we do our avowed enemies like Iraq and Libya,” he argued.²⁴ During the times when the international situations were transforming from the Cold War era into the post-Cold War era, granting China MFN status was the basis for a normal China-U.S. relationship. If U.S. government denied MFN status to China, U.S.-China relations would go backwards. Realizing the significance of granting MFN to China suggested by some insightful persons in the United States, the U.S. political circles particularly the administration did their utmost to lobby Congress. They deemed the MFN issue as fundamental one between the two countries.

Several resolutions opposing renewal of China’s MFN status were proposed at Senate and House in June 1989, as an approach to impose sanctions against the Chinese government. Some China experts testified at hearings before Congress that any pressure from foreign countries including the United States had little influence on domestic situations in China. It was a serious fault to impose economic sanctions against China or cut off economic ties with that country since it would bring about counterproductive consequences including the weakening, not the strengthening, of moderates in Chinese leadership.²⁵Nonetheless, Congress was fraught with anti-Chinese sentiment. It finally decided to assert pressures on the Chinese government and the Bush administration on the issue. The previous consensus on China policy in the United States did not exist any more; instead Americans were divided, particularly between the administration and Congress. As an expert on U.S. Congress once said, cooperative work between Congress and the administration leading to consensus was replaced by malicious remarks, mutual slander in the back, and self-centered criticisms to the other side.²⁶

Debates over China policy in the United States had been nearly concentrated on China’s MFN trade status since the early 1990s. President George Bush’s firm stand on the issue made legislative activities in Congress symbolic, but not substantial. This turned Congress into a place of attacking the Chinese government and criticizing U.S. President’s China policy. Congress opposed granting MFN status to China or attaching additional conditions to it, attempting to impose economic sanctions against China, making MFN a significant political issue that affected bilateral relations.

On May 16, 1990, U.S. House held a hearing concerning MFN, starting to formally discuss the issue in Congress. There were few differences among Americans on the promotion of democracy and human rights in China. But they were divided on the approaches to achieving the goals. Opinions fell into three groups according to the hearings. These opinions actually laid the foundations for the future debates over China’s MFN status in Congress and the United States.

The first group proposed renewal without any conditions. They thought that the lapse of the MFN status would create chaos to U.S. market whose products were mainly provided by China; cause economic retaliations by China and damaged U.S. exporters of farm and industrial products; jeopardize the economic vitality of Hong Kong when its political confidence were at a low ebb; make difficulties to those Chinese people advocating economic and political reform; darken the prospects of resolving conflicts in Asia-Pacific such as the Cambodia question because China was an important regional power.

The second group suggested revoking China’ the MFN status. They argued that the renewal of MFN was a mockery of U.S. regulation that the prerequisite for it is protection of human rights. This would break Chinese citizens’ belief in liberty, confirm the Chinese leader’s extremely arrogant attitude, and present an image of the United States caring only about interests and nothing about principles.

The third one contended that China’s MFN status should be extended conditionally. They recommended (1) extending for six to nine months first and then evaluating the proposal; and (2) extending for a whole year with conditions such as incorporating renewal of the MFN into a broader plan.²⁷

The struggle for China’s MFN status is not only a competition between Beijing and Washington, but also a political wrestle in American society. The issue became more complex when Congress and the administration as well as the Republicans and Democrats were entangled in it.

Generally speaking, U.S. think tanks were comparatively silent when the political atmosphere toward China was negative. Some China experts, however, expressed their concern about the prospects of U.S.-China relations. They supported developing relations with China, believing it would be counterproductive if withdrawing China’s MFN status. To some extend, these voices echoed the president. Although these rational voices were overwhelmed by anti-Chinese sentiment, it was really precious to have their voices heard during hard times. Moreover, some China experts tried to stabilize U.S.-China relations.

Harry Harding, Brookings senior fellow then, warned in a speech at the Asia Society on June 6, 1989 that the current global political trends including the June Fourth Incident would corrode the foundation of U.S.-China relations. He argued that the two factors that Washington could have otherwise improved its relations with China were weakened. The first one was the thawing of U.S.-Russia relations and improvement of China-Russian relations, which led to the slimmer possibilities of playing the “China card” for the United States. The second was that China became less attractive to U.S. companies to invest because of domestic political unrest.²⁸

Zhu Rongji, the then mayor of Shanghai, led a delegation of Chinese mayors to visit the United States from July 7 to 26, 1990. This was the first large official delegation visiting America for a long period since U.S. exercised sanctions against China one year earlier. The delegation met with high-level government officials, Congressional members, and business leaders, including General Brent Scowcroft. Thanks to the NCUSCR, the delegation’s visit made a success. NCUSCR president David M. Lampton, a well-recognized China expert, organized, arranged, and hosted the delegation.²⁹

When U.S. Senate was discussing China’s MFN trade status on June 22, 1991, Senator Max Baucus argued that China should be granted the status. He quoted David Shambaugh who told the New York Times earlier: “There’s no doubt in my mind that revoking MFN would only strengthen the hardline constituency and worsen the human rights situation.”³⁰

The Heritage Foundation upholds ideas that are long held by the Republicans, supporting external trade and promoting American values through free trade despite the fact that it persistently advocates maintaining and developing relations with Taiwan and played up the theory of “China threat.” In terms of trade with China, the foundation maintains that the United States should impose pressure on China concerning market access, intellectual property protection and some other specific issues. But it also stands for developing economic and trade ties with China to influence the trajectory of its development. The Heritage Foundation had upheld the view that China should be granted MFN status without attaching conditions and opposed revoking China’s MFN status throughout the 1990s. When the issue was most fiercely debated in the United States from 1990 to 1992, the foundation published a research report each year in May right before the debate, advocating extension of China’s MFN status. On May 8, 1990, Heritage Foundation senior policy analyst Andrew Brick and others coauthored a report titled Washington’s Agonizing Decision: To Extend or Revoke China’s Most-Favored-Nation Trade Status. The article analyzes some consequences if Washington refused to renew Beijing’s MFN status. According to this report, denying MFN would hurt China, such as dramatically raising tariffs on Chinese exports to American, costing South China’s export industries to lose up to two million jobs, reducing China’s access to much needed hard currency, and isolating that country internationally. It also points out other costs that the U.S. would bear if it denies MFN to China: “increased price and reduced availability of popular Chinese-made products to American consumers and importers,” loss of Chinese markets for U.S. exporters, “sapping the economic vitality of China’s most dynamic region,” enormous new problems for Hong Kong, increased Beijing dependence on arms sales for cash, and isolating moderate elements within the Chinese leadership. It would never encourage Beijing to cooperate with the United States should Washington take a hardline toward Beijing.³¹

In another article published in May 1991, Andrew Brick divides America’s problems with China into two categories: economy and politics. He suggests, “Washington should deal with them accordingly: economic problems should be addressed with economic mechanisms; political problems with political ones.” The article argues that “ending China’s MFN status is not appropriate” because it will hurt reformers in China, consumers in America, and economy of Hong Kong. There are “no grounds for revoking U.S. MFN trade status for China.”³² In an article published in November in the same year Brick enunciates the significance of Chinese strategic position and contends renewing unconditionally China’s MFN trading status and establishing a framework of constructive America-China policy. As he says, “MFN is the backbone of America’s constructive engagement with Greater China’s commercial development.”³³

3.2.2 The Turning Point of Struggle for China’s MFN Status (1993–1994)

In 1992 the Democrat candidate Bill Clinton accused President Bush of U.S. China policy during the campaign, claiming that he would never coddle dictators from Baghdad to Beijing. Clinton said he would seize opportunities to promote American democratic institutions and values and support China’s democratic progress so as to achieve the victory of democracy and free market in China. He criticized President Bush for his “indifference toward democracy.” Bush’s China policy, according to Clinton, “was unwise and unsuccessful” and it “coddled Beijing” too much. Clinton then proposed carrying out China policy with both hard and soft tactics and suggested granting a conditional MFN status to China.³⁴ It remained a focus of attention that how President Clinton was about to deal with the China MFN case. After assuming presidency, however, Clinton changed his tune by saying that it was not necessary for the United States to reject the MFN status for China, and he would not isolate China out of political and economic reasons should China make progress in human rights and some other issues.³⁵

The fact that Clinton changed his tune indicated that he needed to stand out ethically during the electoral campaign, but was faced with post-election domestic pressure, with most business people demanded the renewal of China’s MFN status. Moreover, some think tanks also suggested extending China’s MFN status. In February 1993, the Atlantic Council and the NCUSCR jointly issued a report entitled United States and China Relations at a Crossroad. Recognizing the achievements China had made since the implementation of the reform and opening-up policy, the report recommends the United States to involve in the process and states clearly the important foundations for U.S.-China cooperation in a new era. It argues that the emerging world order in the post-Cold War era since 1989 did not eliminate the reasonability of building up a constructive U.S.-China relationship, even though the reasonability had become more complicated. The United States should attach greater importance to economic, technological and cultural connections, to joint efforts in maintaining Asian stability, and to enlarge China’s participation in resolving multinational issues. It urges U.S. President neither to rescind China’s MFN status nor attach any conditions. Rather, the report proposes conducting strong and quiet talks with Chinese paramount leaders on human rights issue and resuming contacts between high-level military officials in the two countries.³⁶ The group that drafted the report was co-chaired by John Whitehead, former U.S. Deputy Secretary of State, and Barber Conable, Jr., president of the World Bank. Group members include former Secretary of State Edmund Muskie, former Secretary of Defense Harold Brown, and former U.S. Ambassadors to China Leonard Woodcock as well as Arthur Hummel. The report drew plenty of attention from the American political circle. Former Secretaries of State Alexander Meigs Haig, George Shultz, and Henry Kissinger, former U.S. President Richard Nixon, and a NCUSCR delegation visited China successively from February to May. Seth Cropsey, director of Asian Studies Center at the Heritage Foundation, contends, “Beijing’s economic reforms were originally set into place to reverse China’s slide into poverty and technological inferiority.” However, this policy “carries unintended side effects.” The policy “eats away at Beijing’s central control” and promoted the development of human rights. In consequence, Cropsey urges President Clinton to “grant China MFN trade status without condition.”³⁷

At the very beginning of his presidency, President Clinton attached great importance to economic factor to U.S. foreign policy by listing economic security at the first place among three strategic goals. As Chinese economy grew rapidly, the voices asking to grant China MFN status were getting stronger in American society. In this context, Clinton took a middle way. He avoided violating his pledges during the campaign and thus antagonizing Congress on one hand, and evaded extreme measures (such as revoking China’s MFN status) and confrontations with China that might damage American political and economic interests on the other hand. Taking these factors into account, the Clinton administration decided to link China’s MFN trade status to its human rights performance.

Clinton made an announcement in May 1993 to extend China’s MFN status, but attached human rights conditions to it in 1994. Richard Solomon, president of the USIP and Assistant Secretary of State for East Asian and Pacific Affairs in the Bush administration, criticizes the decision by Clinton in an article appeared at the Washington Post. “With a Democratic administration now in the White House, the president has been able to forge a coalition with Congress that will impose human right-related conditions in considering MFN a year from now while leaving our concerns about China’s proliferation activities and trade practices to be dealt with by other measures,” he observes. “This policy adjustment gives the administration greater flexibility in dealing with China but puts our growing economic ties at risk, based on human rights criteria not specified in the Jackson-Vanik Amendment.” He argues that Washington has a long-term national interest in constructive relations with China. The current surge in China’s economic growth is the “most powerful force for bringing about the very changes we are now seeking through sanctions.” Conditions in China have improved dramatically since 1972. Focusing on “MFN as our primary source of leverage on China” would put “the entire relationship at risk” with costly price and questionable effectiveness. The most effective way is to “remain engaged with China in a way that offers benefits for cooperation as well as sanctions for misdeeds.” Lastly Solomon contends that U.S. “policy should be cast to reinforce these trends,” which over time are bound to bring about political and economic openness in China.³⁸

Both the administration and Congress enjoyed a Democrat majority after Clinton took office. To a large extent this alleviated the confrontations between the two branches. China’s economy resumed growing rapidly after Deng Xiaoping’s southern tour in 1992. The deepening economic reform and improvements of investment environment boosted foreign investors’ confidence in China. The U.S. business community then surged into China once again. In May 1993, the International Monetary Fund concluded that according to the criterion of purchasing power parity (PPP) China’s economy is the third largest one, behind the United States and Japan. The news was released at the front page of the New York Times and made a big stir in the United States.³⁹ The North Korean Nuclear Crisis in 1994 was a turning point. China’s position on the crisis was of critical importance, suggesting its strategic significance. Foreign policy community and some notable persons thus denounced the Clinton administration’s China policy. Well-recognized China experts including Henry Kissinger, Doak Barnett, and Harry Harding delivered lectures and speeches one after another. They opposed to develop U.S.-China relations utterly based on human rights practices. Thanks to their efforts, American perceptions of placing human rights issue over U.S.-China relations were gradually changed. On May 11, the America-China Society (with Henry Kissinger and Cyrus Roberts Vance as co-chairmen) released a report on U.S.-China relations that had already been submitted to President Clinton. The report suggests that Clinton take the initiative to renew the MFN status and de-link it with human rights. Leaderships from both the United States and China must strengthen jointly the development of strategic U.S.-China relations in case that the overall relationship was severely damaged by any unilateral policy miscalculations. Besides, the two parties in the United States should reach an agreement to make a constructive China policy.⁴⁰

A study by James Lilley, former U.S. Ambassador to China, and Wendell Willkie for the AEI estimates that to derive China of MFN could cost America 180,000 high-paying jobs. If MFN privileges were withdrawn next month the Chinese would abruptly cancel contracts with Boeing.⁴¹ Lee Hamilton, one of the contributors of the study and senior congressman of Indiana, argues that threatening the termination of MFN or attaching conditions to it was no longer policy tools of the United States. He points out that Washington has political, economic, security, and diplomatic interests in China as China’s economy fast grows. No country will be able to determine China’s future, only the Chinese can. Washington hence should adopt a “policy of realism,” and the “task of policy will be to protect U.S. interest, whatever occurs.” In the short term, U.S. policy is to encourage a positive direction for post-Deng China. According to Hamilton, the Jackson-Vanik amendment and the concept of MFN conditionality were “policy measures created during a different era to achieve a different policy purpose vis-à-vis a different government.” “If the emerging answer from the expert community is no, then it is time for political leaders to think about moving beyond MFN, toward a better policy to protect and promote the U.S. national interest,” Hamilton says.⁴² Meanwhile, Wendell Willkie made a speech at the Heritage Foundation, elaborating the reason of U.S. China policy dominated by the MFN issue. He summaries the origin and development of the Jackson-Vanik amendment and compares the difference between China and former Soviet Union, arguing that extension of MFN for China can not only protect American business interests, but also communicate American ideal and values to the Chinese people through trade exchange.⁴³

Under this background, Clinton finally announced to de-link China’s MFN status with its human rights record on May 26, 1994. As observed by the Los Angeles Times, it is a difficult political decision after deliberation for Clinton to extend China’s MFN trade status. In fact, Clinton realized the necessity to establish a constructive and long-term strategic relationship with China.⁴⁴

Before Clinton made his announcement, the Heritage Foundation had issued a series of research reports, claiming that the Clinton administration’s China policy was a failure and supporting extension of MFN status to China without any conditions. The foundation released a report entitled Ending the Confusion in U.S. China policy by its Policy analyst Brett Lippencott in April 1994. Lippencott argues in the report that Clinton’s China policy is based on a fundamental contradiction. On the one hand, he wants to engage China, “hoping to solicit its cooperation on the problem of North Korea and nuclear proliferation.” On the other hand, he wants to force China to improve its human rights record by “threatening to punish and isolate it with trade sanctions,” he says. This contradiction has created a “confusing policy of mixed signals and misunderstanding that is making a mess of America’s Asia policy.” According to this report, MFN is important, but not the only issue defining relations between Washington and Beijing. “America has other critical interests that require Chinese cooperation.” Therefore, he makes some recommendations for the Clinton administration, including: (1) “Confer permanent and unconditional MFN status on China;” (2) “De-link trade issues like MFN from human rights issues while increasing the number of high-level diplomatic meetings to address human rights concerns;” (3) “Encourage China to lower barriers to trade and investment;” (4) Strengthen support of Taiwan by helping it remain “a positive example for reform on the mainland;” (5) “Help Hong Kong to remain a vibrant center for commerce and an example of democratization in Greater China;” (6) “Press China to persuade North Korea to end its nuclear weapons program;” (7) “Increase U.S.-China military contacts as a means to stop China’s missile sales to rogue states.”⁴⁵ After Clinton announced de-linking MFN with human rights, the Heritage Foundation issued an updated report of Ending the Confusion in U.S. China Policy on June 3. This report approved of Clinton’s decision. Richard Fisher, acting director of Asian Studies Center at the foundation, observes that by continuing to grant MFN to China, “Clinton will help advance the $38 billion trading relationship which the U.S. now enjoys with the world’s fastest growing economy.” Besides, “by increasingly prosperity in China through greater trade, the U.S. can help to create the economic freedoms” that are the foundation of political freedom to be promoted. This report finally points out that on critical issues such as relations with China, the President must “constantly navigate among competing demands such as human rights, trade, and potential regional conflicts.” Clinton’s failure to decide on a balanced China policy one year earlier was the “principal cause of this year’s embarrassing policy reversal.”⁴⁶ Although these reports claim that the viewpoints did not necessarily reflect those of the Heritage Foundation, but it does reflect the foundation’s policy orientations, judging form the its series of reports on China MFN trade issue and persistent support of it.

3.2.3 Routine Reviews of China’s MFN Status (1995–1999)

Through the 1990s, congressional members could generally be divided into two groups on China’s MFN issue. Some advocated pressuring China by revoking its MFN status or attaching conditions to it. This group aimed at achieving U.S. goals with antagonistic measures. Some others contended that the United States should extend China’s MFN status unconditionally and influence China by engaging it. They rejected to impose pressure on China through ways including withholding MFN status and attaching human rights conditions. There were no obvious differences between the two groups on goals: both were concerned about China’s human rights record, bilateral trade, and China’s nuclear proliferation; both asked China to comply with international norms and accelerate economic reform and democratic progress. However, they remained divided on how to fulfill these goals. The dissonance in Congress indicated the diverse tactics and means for implementing the same policy.

The de-linkage between trade and human rights in 1994 introduced a new stage for the struggle on the MFN issue, which had become less significant. Despite the impasse of U.S.-China relations because of the Taiwan issue in 1995-1996, China’s MFN status was still extended for a year. Resolutions that opposed renewal were rejected in House with a clear majority. The intensity of partisan competition and factional conflicts was greatly alleviated, with unclear partisan divide between Republicans and Democrats on the issue. The review of China’s MFN status was reduced to a routine procedure in the 105th Congress. Christian conservatives’ involvement in human rights issue in 1997, along with the Cox Report and U.S. bombing of the Chinese Embassy in Belgrade in 1999 once produced negative effects on Congressional annual review, but these controversies were much less acute compared with the debates in the early 1990s, particularly during the Bush administration. In 1998, U.S. Congress passed a bill that changed MFN status to PNTR status. Members of Congress started to look for other means vis-à-vis the MFN trade status to impose influence or pressures on China, which further decreased the importance of the MFN issue. To some extent, MFN status was not a key issue for U.S.-China relations any more. Congressional members had persistently reviewed, debated, and then renewed China’s MFN status for many years. A reason that could not be neglected was that Congress was playing with politics so as to exercise pressure on China, hoping it could compromise on issues like trade, human rights and arms sales.

When Congress was discussing China’s MFN status, Brett Lippencott of the Heritage Foundation argues in an article in July 1995 that Representative Frank Wolf’s attempt to revoke China’s trade privileges is “misguided.” And the best way to encourage China to respect international norms of behavior is through “policies that promote the rule of law, free trade, economic reform, and democratization in China.” Countermanding China’s MFN status, however, “could strengthen hardline elements within the Chinese leadership.” Lippencott then listed eight reasons why the United States should maintain China’s MFN status: (1) “Conditioning or revoking trade would impede, rather than advance, the betterment of human rights in China;” (2) “Rescinding or conditioning MFN status would harm American business interests in China and cost the American economy thousands of high-tech, high-paying jobs;” (3) “MFN’s encouragement of economic rights will lead eventually to demands for political rights;” (4) “Denying MFN status could cause retaliatory sanctions against American companies that would be counterproductive to the advancement of human rights in China;” (5) “Denying China MFN status would weaken Hong Kong as a vibrant commercial center;” and (6) “Rescinding MFN status will not encourage China to adhere to international limitations on transfer of nuclear technology or weapons of mass destruction.”⁴⁷

Clinton announced to extend China’s MFN status unconditionally on May 20, 1996. Following the announcement, Stephen Yates, policy analyst at the Heritage Foundation, appreciates the administration’s right decision in an article. He analyzes the significance of the extension of MFN for China and argues that it serves U.S. long-term interests. For him, “Because of its size and rate of growth, China will have an enormous impact for good or for ill on U.S. interests. Therefore, it is prudent to improve the management of this critical relationship and to seek China’s cooperation before forcing the American and Chinese people to pay the enormous security and economic costs of revoking MFN.” Yates argues that the MFN debate unfortunately is caught up in two mistaken beliefs: (1) that MFN is privileged treatment and (2) that revoking MFN would be an effective way to force a favorable change in China’s behavior. According to him, revoking or conditioning MFN gains too little and risks too much” for the United States. He points out eight reasons for the United States to extend the MFN, as revoking MFN for China would (1) “harm American workers;” (2) “threaten U.S. business and investment;” (3) “jeopardize economic reform in China;” (4) “damage the economies of Taiwan and Hong Kong;” (5) “not improve human rights conditions in China;” (6) “not encourage China to adhere to international limitations on transfer of nuclear technology or weapons of mass destruction;” (7) “unnecessarily set the U.S. on the road to prolonged confrontation with China;” and (8) “violate a U.S. interest in free trade and a more open China.” Yates then suggest to “renew China’s MFN status,” “invite China’s President Jiang Zemin to the White House for a full state visit,” “repeal or amend the Jackson-Vanik Amendment,” and follow a more broad-based strategy toward Asia rather than “putting too many eggs in the China market basket.”⁴⁸

When the debates over the so-called “China threat theory” came to a climax in 1997, U.S. Congress considered enacting legislation on the issue of human rights and threats that China poses to the United States and Asia. Members of Congress proposed a variety of acts including the China Policy Act of 1997. According to the act, Washington would not revoke China’s MFN status, but target against affiliated companies of the People’s Liberation Army (PLA) that illegally transfers weapons or technology and poses threats to U.S. security. Meanwhile, private enterprises were excluded. Stephen Yates argues that the three guiding principles of the act should be “the cornerstone of U.S. legislation on China policy.” The three principles include: (1) “punish the transgressor;” (2) “cut aid, not trade;” and (3) “strengthen the promotion of democracy.” Moreover, he also recommends lawmakers to remove export controls on supercomputers and narrow the definition of “PLA affiliate” to include only companies or enterprises that are wholly or majority owned by the PLA.⁴⁹ On July 22, 1998, President Clinton singed the Internal Revenue Service (IRS) reform bill. According to the bill, “the term ‘normal trade relations’ should be substituted for the term ‘most-favored-nation.’” This is the progress that U.S. China policy made at that time.

Jiang Zemin paid a historical state visit to the United States in October 1997, and President Clinton paid a return trip to China in June 1998. The Republicans were strongly opposing Clinton’s state visit to China. The Brookings hosted a discussion on June 15. Bates Gill, the then director for Nonproliferation Studies at Monterey Institute of International Studies, Nicholas Lardy, senior fellow at the Brookings then, and Richard Haass, director of Foreign Policy Studies at the Brookings, discussed a series of questions including whether President Clinton should visit China at this time, whether China was responsible in combating the proliferation, and whether the United States should renew China’s MFN status.⁵⁰ On June 17, former U.S. Presidents Gerald Ford, Jimmy Carter, and George Bush, and eight former Secretaries of State, six former Secretaries of Defense, five former Secretaries of the Treasury, and five former Assistants to the President for National Security Affairs including Henry Kissinger, Zbigniew Brzezinski, Cyrus Vance, Alexander Haig, George Shultz, Dick Cheney, Brent Scowcroft, James Baker, III, Lawrence Eagleburger, Warren Christopher, Anthony Lake, and William Perry submitted an open letter to U.S. Congress. The letter argues, “American foreign policy cannot succeed if it fails to engage China.” To establish stable and lasting relations has been “a principal objective of American foreign policy since President Nixon’s historic visit in 1972, and has been supported by all subsequent administrations of both parties.” “The importance of the strategic relationship is underscored by current developments in the region, particularly Asia’s financial crisis and the nuclear tests by India and Pakistan.” China continuing open and reforming its economy and improving the quality of life of its citizens is “in the vital interest of the United States.” According to the open letter, despite the dispute between the two countries, it should not impinge upon “a strong, consistent policy towards China.” The letter suggests President Clinton to visit China as scheduled. It also recommends to extending normal trading relations to China.⁵¹ The New York Times, Washington Post, and Wall Street Journal published this open letter in their front pages on the same day. On June 22, two well-known Brookings China experts, Harry Harding and Nicholas Lardy, were invited to the White House to drop a hint to the press about President Clinton’s upcoming visit to China. Harding remarked that “the President’s visit to China will introduce him to the complexity of that country,” and “the President will see that Chinese society is far freer than at any other time since 1949” as well as all kinds of problems facing China. “If through this visit we all can acquire a better understanding of China’s dynamism and complexity, that alone I think will be a significant contribution to U.S.-China relations,” he said. Lardy pointed out that China’s currency was stable, economy was growing, and foreign investment was also quite open, resulted in “the migration of labor-intensive manufacturing” from other countries and areas to China in recent years. Besides, China had been one of top ten fastest growing export markets for the United States. Moreover, “the Chinese have been very supportive of the program” of the International Monetary Fund during the Asian financial crisis.⁵²

On July 21, 1998 when Congress was debating on China’s MFN status, Stephen Yates explains again in an article the reason for the United States to renew China’s status. First, “MFN helps to roll back the socialist welfare state by expanding China’s private sector” and individual freedoms. Second, “MFN affords American firms the opportunity to increase participation in China’s market.” Third, a continued MFN “will promote stability for Hong Kong.” Fourth, “MFN is not special treatment,” and “is trade jargon for the normal status the United States grants to virtually every trading partner.” Fifth, MFN can increase “American access to the Chinese people.” Sixth, targeted measures could better address specific policy concerns. He points out finally that “denying or threatening to deny MFN to China solves nothing,” and normal trade relations with China are “part of an overall U.S. policy toward China.”⁵³ Aaron Lukas, Analyst at the Cato Institute’s Center for Trade Policy Studies, argues in an article that the United States should renew MFN for China this year and “make it permanent.” According to Lukas, there is nothing “favored” about MFN status, as only six countries currently lack it. In fact, China is “the only major U.S. trading partner without permanent MFN status.” Lukas contends, “Congress will be making a grave mistake if it fails to renew normal trade relations with China.” The most obvious effect for it would be to force Americans to pay much higher prices for products from China because of increase of customs. This “would have a disproportionate impact on the poor.” Besides, “American businesses would also pay a heavy price,” particularly the smallest ones, that depend on trade with China. Refusing to grant MFN status to China would also “help European and Japanese competitors who are unlikely to follow the U.S. lead in restricting trade.” Those competitors “are ready, willing and able to pounce on every market opportunity we leave behind.” Furthermore, “isolating China would do nothing to help victims of oppression there.” By contrast, through engagement China is moving toward the right direction.⁵⁴

Before U.S. Congress was about to discuss whether China’s normal trade relations (NTR) status should be withheld in July 1999, the Cato Institute’s Center for Trade Policy Studies issued a report titled Trade and the Transformation of China: The Case for Normal Trade Relations. According to the report, China today is America’s Number 4 trading partner. In 1998 Americans imported $71 billion worth of goods from China and exported $14 billion to China, making it the 13th largest market abroad for U.S. goods. Revoking China’s NTR status would “raise average tariff rates on Chinese goods entering the United States from 4% to more than 40%, putting a chill on U.S.-Chinese commercial relations.” As the report put it, “trade encourages human rights and facilitates the work of Western religious ministries active in China” because commerce and economic reform enable China to have more access to the external world. Moreover, the report points out that making “China’s NTR status permanent before its entry into the WTO would allow American companies to reap the benefits.” China’s WTO membership would encourage further economic reform in China and restore its faltering economic growth. To facilitate that entry, the United States should drop its unreasonable demands that China agree to an extension of U.S. quotas on textile imports and stricter antidumping and self-disciplined rules that discriminate against Chinese exports.”⁵⁵

3.3 Think Tanks and Legislation of China’s PNTR Status

The PNTR status between China and the United States is previously known as MFN status. As mentioned above, China’s MFN trade status had to be annually reviewed in U.S. Congress from 1990 through 2000. Although it was extended each year, there is little doubt that the annual review disturbed China-U.S. relations periodically.

The United States and China reached a consensus on China’s entry to the WTO after thirteen-year-long negotiations between the two countries. In October 1999 they signed a treaty that paved the way for China’s accession to the organization. As the world’s largest economy, the United States played a decisive role in the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) negotiations and negotiations over China’s participation in the WTO.

According to regulations of the WTO, member states enjoy privileges of reciprocal trade in multilateral framework. To this end, the United States had to first pass a legislation granting China PNTR status. But the issue remained controversial in America. Social forces including labor groups, human rights groups, religious right groups, pro-Tibetan independence forces as well as environmental protection organizations were opposing PNTR for China. They exerted great pressure on Congress. At the same time, extreme liberal Democratic and extreme right-wing Republican members of Congress formed an intangible coalition. Nonetheless, the Clinton administration, U.S. business community, particularly large enterprises, and various famous scholars supported China’s PNRT status.

The discussions about China’s PNTR status are quite similar to that about MFN issue. Those proponents argued that granting China PNTR status enabled the United States to trade and contact with China. Beijing would then open the door and integrate itself into the international society and gradually learn how to comply with international norms. On the other hand, the opponents held the belief that granting PNTR would neither bring economic interests to the United States nor help to improve Beijing’s human rights performance. Rather, it would augment the capabilities of military and security agencies. And this was virtually encouraging the despotism.

If one considers that the normalization of China-U.S. relations in the 1970s opened a door for the two countries, the legislation granting China PNTR was then a golden key initiating China-U.S. relations in the new century, which could fundamentally change the developmental process of their bilateral relations in the future. Therefore, the White House considered the legislation as the most significant affair since the establishment of diplomatic relations with China. The Clinton administration thereby spared no expense in escorting the bill.

The bill needed to be passed first in House. The proponents and opponents were equally matched in House. So the Clinton administration decided to lobby House representatives first. President Clinton lobbied them face-to-face for many times and enunciated the significance of normal trade relations with China. He gave more attention and efforts to those Democrats who held a wait-and-see attitude. Moreover, he kept making calls to members and urged them to support PNTR for China.

In order to conduct lobby activities among different departments, the Clinton administration established a team to coordinate with Congress. The team functioned like an inter-departmental agency that was headed by William Daley, the then Secretary of Commerce, and composed of seven ministerial officials. The team put forward a wide variety of suggestions and made arrangements for President or Cabinet members to meet with House members whom the administration needed to enlist help. Frank Wolf, an anti-China Republican Congressman, protested the administration’s lobbying efforts and demanded to monitor the team. According to U.S. laws, administration departments are forbidden to lobby Congress with taxpayers’ money. Nor could they instruct business community to do so.

At many hearings before Congress, officials of the administration repeatedly underscored the significance of China’s PNTR and urged Congress to support the Clinton administration.⁵⁶ Charlene Barshefsky, U.S. Trade Representative, and Lawrence Summers, U.S. Secretary of the Treasury, emphasized at the hearing before the Senate Financial Committee that U.S.-China Trade Agreement was consistent with national strategic interests and was important to safeguard American national security and business interests as well as to push China’s transformations. Barshefsky, Summers, Secretary of Agriculture Daniel Glickman, and Secretary of Commerce William Daley testified again at a hearing before House Committee on Ways and Means on May 3.⁵⁷

In addition to soliciting support from representatives face-to-face, high-level officials in the Clinton administration delivered speeches constantly during that time and elaborated the importance of PNTR to China. They thought that granting China PNTR could help to open the Chinese market and push China’s transformations. So granting PNTR was consistent with U.S. interests. Clinton also expounded repeatedly on many occasions on the importance of PNTR for China. On March 8, 2000, the day when the bill of China’s PNTR status was submitted the Congress, Clinton gave a speech at the SAIS of the Johns Hopkins University and explained the crucial meanings for maintaining normal trade relations with China. “If you believe in a future of greater prosperity for the American people, you certainly should be for this agreement. If you believe in a future of peace and security for Asia and the world, you should be for this agreement.” Clinton alleges, “I’ll do what I can to convince Congress and the American people to support it.”⁵⁸ In order to affect those undecided representatives, Clinton gave speeches in Ohio and Minnesota successively on May 12.⁵⁹ Ohio is a state with strong labor groups. Clinton discussed with local laborers, business and religious leaders about some questions that they were concerned. Representative Thomas Sawyer, who then had not made his final decision on the bill yet, invited Clinton to Ohio. In his speech in Ohio, President Clinton claims that granting China PNTR status and “China entry to the WTO will slash barriers to the sale of American goods and services in the world’s most populous country.” “Refusal to pass PNTR would put Ohio farmers, manufacturing, workers at a disadvantage” and “our Asian and European competitors would reap these benefits.” Lastly, Clinton argues, “China’s accession will help promote reform in China and create a safer world.”⁶⁰

In order to be more convincing in lobbying, the Clinton administration played a role of coordination to create conductive atmosphere for supportive members of Congress by inviting influential social elite to voice forcibly their opinions. Three former U.S. Presidents, four former Secretaries of State, four former Secretaries of Defense, three former National Security Advisors, and forty-two State Governors expressed their support for China’s PNTR status in different ways. On May 8, Federal Reserve Chairman Alan Greenspan and three former Presidents Gerald Ford, Jimmy Carter and George Bush pushed for approval of the PNTR bill. The White House also released an open letter by the three former Presidents. On May 9, under the chair of President Clinton, former Presidents Carter and Ford, and some various former political leaders gathered in the White House to urge Congress to grant PNTR to China. Clinton, Al Gore, Ford, Carter, Kissinger and Baker gave speeches and explain the significance of the PNTR bill. Such large-scale gatherings in the White House were seldom seen in American history. The purpose of these gatherings was to create a favorable environment for the bill, encouraging those undecided Congress members to support it. Furthermore, the White House also released a large number of letters by forty U.S. State Governors who supported trade relations with China, open letters to Congress by more than two hundred high technological corporations including Microsoft and IBM, and joint letters by 149 economists including 13 Nobel laureates who supported China’s accession to the WTO.

On September 20, 2000, the bill was passed by a vote of 83 versus 15 in Senate. President George W. Bush signed the act on December 27, 2001, announcing officially that China would be granted PNTR status since January 1, 2002. The passage of the bill also suggested the end of the annual Congressional review of China’s MFN trade status according to the Jackson-Vanik Amendment of 1974. In effect, before President Bush signed the bill, the fourth WTO ministerial meeting had already passed China’s application to WTO membership on November 10, 2001. China therefore became a formal WTO member since December 11 of the same year. The decision by President Bush marked the normalization of U.S.-China trade relations and China’s final integration into the norm-based global trade system. Beijing welcomes Washington’s decision. The resolution of PNTR issue not only facilitate trade cooperation between the two countries, but also create a better environment for developing more stable and healthier economic relations between them.⁶¹

In the course of China’s PNTR legislation, many U.S. think tanks issued a large number of research reports to analyze the relations between the legislation and U.S. national interests. For example, the National Bureau of Asian Research published a report titled Promoting U.S. Interests in China: Alternatives to the Annual MFN Review in June 1997. The report was composed of several insightful articles, such as David M. Lampton’s “Ending the MFN Debate,” Laura D’Andrea Tyson’s “Are Economic Sanctions an Effective Tool for Realizing U.S. Interests in China?” Douglas Paal’s “Alternatives to Revoking MFN from China,” Nicholas Lardy’s “Normalizing Economic Relations with China,” and Kenneth Lieberthal’s “WTO, MFN, and U.S.-China Relations.”⁶² Lampton argues that the annual debate over MFN has become the fruitless dialogue between Congress and the President on China policy. Besides, the process “has produced virtually no discernible change in Beijing’s policies.” He then suggests “granting permanent MFN status in the context of China’s accession to the World Trade Organization (WTO).”⁶³

When U.S. Congress was reviewing China’s PNTR status around May 2000, think tanks including the Heritage Foundation, the Brookings, the CSIS and the AEI released reports to support granting China PNTR status. The Heritage Foundation published a report titles How to Trade with China Benefits Americans, which claims that granting China PNTR is “good policy” because it “will afford many benefits to Americans,” including (1) increase “access to China’s large potential market” and safeguarding U.S. commercial interest; (2) helping “integrate China into the world’s economic system and create the conditions that empower the people of China to seek additional freedom and democracy;” and (3) promoting U.S. national interests, maintaining U.S.-China relations and peace and stability of the Asia-Pacific region, which is one of “America’s key strategic interests.”⁶⁴

In an article titled “Permanent Normal Trade Relations for China,” Nicholas Lardy argues that granting China PNTR “is strongly in the U.S. national interest for several reasons.” First, denying China PNTR status would not impede China’s accession to the WTO. But it means that U.S. firms “would not benefit from most of the sweeping market opening measures to which China agreed in the November 1999 bilateral agreement.” Granting PNTR, however, would provide the United States with as the same opportunities as its European and Japanese competitors, most notably in financial services, telecommunications and distribution. Second and even more importantly, “the failure of the U.S. Congress to grant PNTR to China would undermine the position of reformers in China.” Third, failure to do so would “significantly undermine the position of our negotiators in the final stage of China’s entry to the World Trade Organization.” And lastly, a “positive vote would strengthen bilateral economic relations more generally.” He also refutes those people who were deeply concerned about granting PNTR to China.⁶⁵

The Cato Institute also issued a wide range of reports supporting PNTR legislation. When the United States and China reached an agreement on China’s entry to the WTO in 1999, James Dorn, China specialist at the Cato Institute, argues in an article, “the battle for Congressional support is about to begin.” “China can enter the WTO without a vote by Congress, provided two-thirds of the 135 member nations support accession. But Congress must grant China permanent normal trade relations. If it does not, the stunning market-access benefits in the recent accord will flow to other nations, but not to the United States.” He argues, “Congress should repeal Jackson-Vanik, join the EU and Australia in ending the non-market economy methodology for China, and make sure the WTO protocol is consistent with free-trade principles.” “Until the schizophrenic treatment of China ends, the symbol of the United States as the world’s champion of freedom must be questioned,” Dorn asserts.⁶⁶ Mark Groombridge, Research Fellow at the Cato Institute’s Center for Trade Policy Studies, provides a detailed explanation of the reasons to support PNTR in an article in April 2000. The article argues that PNTR can help pro-reform leaders in China move their country in a market-oriented direction. “Granting PNTR and China’s subsequent accession to the World Trade Organization will benefit, not only the United States and the world trading community, but most directly the citizens of China.” Besides, it will enable U.S. companies to “take full advantage of the market access provisions that China has agreed to adopt in order to comply with WTO rules and obligations.” Otherwise, The United States cannot catch the opportunity and give it to competitors in Europe and Japan. Congressional annual debate on whether to extend normal trade relations is not an “effective tool for influencing China’s long-term behavior,” Groombridge claims. “As a member of the WTO, China will be subject to a multilateral dispute settlement process that is likely to be far more effective than sanctions imposed unilaterally by the United States.”⁶⁷ Doug Bandow, senior fellow at the Cato Institute, argues that freer trade is likely to advance human rights and boost business profits in an article titled “Trade with China: Business Profits or Human Rights” published in May when Congress was debating over China’s PNTR status. He believes that extending PNTR to China and making China a member of the WTO would push China’s economic reform. Beijing has begun revamping the baking sector and planning to relax investment and trade controls, and Chinese companies are maneuvering to better meet anticipated international competition. “Everyone wants a freer, more democratic China,” Bandow says. “Granting PNTR to Beijing would make that more likely.”⁶⁸

Some think tanks hosted conferences and seminars to shed more light on the issue. In the context of the forthcoming Congress vote on PNTR for China, the CFR invited Democratic Senator Max Baucus from Montana to discuss the issue on May 1, 2000. Baucus had been a supporter for trade relations with China on the issues including China’s MFN and PNTR status since the administration of George Bush. He took the advantage of this chance to explain why the United States should renew PNTR status to China. Granting China PNTR status and allowing it to enter the WTO smoothly—treating China with respect—will help to integrate China into the global society and provide Washington more chances to encourage China’s reform, despite many uncertainties. By contrast, without PNTR with China, “the uncertainties are even greater.” Except for business loss, it will “strengthen the hardliners’ hands.” In order to get the PNTR bill passed, Baucus suggests educating the public and also members of Congress the importance of the issue for U.S.-China relations.⁶⁹ On May 5, 2000, headed by the CFR, Eight U.S. think tanks were participated in a hearing discussion of China’s PNTR. Famous China experts from think tanks, including the Nixon Center, the Heritage Foundation, the IIE, the Brookings, the New America Foundation, and representatives of automobile and some companies were invited to address these themes. Notable persons including Michael Amarcost, president of the Brookings, Fred Bergsten of the IIE, John Hamwrath of the CSIS, Edwin Feulner of the Heritage Foundation, Jessica Matthews, president of the Carnegie, James Thompson, president of the RAND, Dimitri Sans, president of the Nixon Center, and James Schlesinger, president of the Nixon Center Advisory Council and former U.S. Secretary of Defense were present. Congressman Sander Levin chaired the discussion and House Republican Congressman Philip Crain gave a speech. At the very beginning of the discussion, CFR president Leslie Gelb delivered an address, considering the discussion to be “important and historic” because participants were “talking not only about WTO status for China or permanent trading relations for China with the United States, but the future of strategic relationship between our country and another major power.” Gelb stressed that “this an educational exercise for the American people” but “not a lobby event.”⁷⁰

Some other think tank senior fellows gave testimonies at hearings before Congress. Bates Gill, director of Brookings’ Center for Northeast Asia Policy Studies, testified at a hearing before the Senate Committee on Foreign Relations and analyzed the implications of PNTR for U.S. national security in July 2000. First, he analyzes the complexities of U.S.-China relations, holding that “complex problems call for complex tools” and should not be simplified. Gill contends that “maintaining a stable relationship with China” with “diverse, flexible and sharpened set of tools” could achieve U.S. national security interests. He then summarizes U.S. security policy toward China with a special reference to the policy that works and does not work. Lastly, Gill outlines some recommendations for future U.S. security policies toward China. First, Washington should adopt “a continuing engagement approach” that “leavened with greater pragmatism” so as to shape “favorable directions in Chinese domestic, foreign, and security policies” in the context of expecting U.S. “security-related relationship with China to enter a more complex and difficult period.” Second, greater “intelligence and analytical resources” are demanded toward a better understanding of China. Third, Washington needs to fully consider the modernization of China’s strategic weapons when deploying its national missile defense plans.⁷¹

Undoubtedly, not all think tanks showed their support for granting China PNTR. The EPI, for example, persistently voiced its opposition against the policy. Before Congress was about to debate over the issue, EPI research fellows including Robert Scott, Jeff Faux, and James Burke published many issues of reports in the first half of 2000, such as The High Cost of the China-WTO Deal: Administration’s own analysis suggests spiraling deficits, job losses, PNTR with China: Economic and political costs greatly outweigh benefits, U.S. investment in China worsens trade deficit, China and the States—Booming trade deficit with China will accelerate job destruction in next decade, and Job losses under the China-WTO proposal. They opposed the Clinton administration to reach agreement with Beijing on China’s entry to the WTO, arguing that the loss outweighs the gain and would lead to increasing job losses.⁷²

In May 2000, EPI senior fellow Robert Scott published a paper, arguing against the “opportunity reports” issued by the Clinton administration. He alleges that these “reports not only fail to provide a single estimate of the jobs to be gained in any of the states, they also totally disregard the role of imports in trade.” He warns that granting PNTR to China would bring about three consequences. First, the “absolute level of the U.S. trade deficit with China will increase by at least 80% between 1999 and 2010, resulting in the elimination of 872,091 jobs during the next decade, even if U.S. exports to China grow more rapidly than imports from that country.” Second, “Every state will suffer significant net job losses over the next decade, as U.S. trade deficits expand.” California, Texas and Pennsylvania are the top three states that suffer job losses most. Third, “Every industry in the United States will lose jobs due to increased trade deficits, including agriculture and other natural resources” and particularly manufacturing. “The United States deserves a better deal,” argues Scott. “This proposed trade pact does not solve the current U.S. trade problem with China and will, in fact, make matters worse.” “By abandoning Congress’ annual review of trade relations with China,” he adds, “the United States is forever sacrificing all other means for dealing with this problem, leaving the weak WTO dispute resolution system as the only mechanism for addressing trade problems.”⁷³

James Burke had a report published on the same day as Scott did. The report argues that one of the most important impacts by the negotiated trade pact—that paves the way for China’s entry to the WTO—is causing more capital inflow to China. U.S. multinational forms invest in China to conduct export-oriented production and then export these cheap products to the United States and other industrial countries. To a great extent, this results in a greater U.S. trade deficit with China. Put differently, the “rapidly growing U.S. trade deficit with China is directly linked to the growth of multinational firms operating in China.” Chinese workers are more competitive than their U.S. counterparts due to “the much cheaper labor” and “poorly protected workforce” in China.⁷⁴ Jeff Faux also published a report that analyzes the trade and investment pact reached by the Clinton administration and Beijing from political and economic perspectives. The report argues that the economic and political costs of PNTR with China greatly outweigh benefits and “the net impact on U.S. employment and domestic business is likely to be negative rather than positive.” Moreover, drawing from U.S. recent experiences in Russia and Mexico, “the claimed geopolitical benefits of this trade agreement are less than credible.” Faux warns that to “deny America its one non-military instrument of leverage in exchange of limited financial benefits that would go to a few multinational investors is a risky and irresponsible policy.”⁷⁵

After discussions and debates in the 1990s, a growing number of people realized that imposing pressures on China with regard to MFN status could not achieve the goal that the United States wanted. Rather, these hardline approaches backfired. In the meantime, as China grew rapidly in both economical and political terms, the United States was of significance to China’s political, economic and security interests. Therefore, it had become the mainstream perception for Washington to think beyond the MFN issue. In this context, opponents such as the EPI were finally overwhelmed by a vast majority of proponents. Despite the fact that some members of Congress expressed similar opposing opinions, the PNTR bill was still passed in Congress, particularly in Senate with a huge majority.

Similar to disputes over China’s PNTR status, Americans were divided on China’s accession to the WTO. Just as the CSIS comments, “Chinese membership of the WTO has long been a controversial issue.”⁷⁶ U.S. think tanks discussed the implications of China’s entry to the WTO for both U.S. national interests and international economic system from various angles. The mainstream position held by think tanks was to support China’s efforts to join the WTO.

Nicholas Lardy published an article titled “China and the WTO” in 1996. The article sets forth the importance and necessities of a policy of comprehensive engagement from economic perspective. Lardy stresses that the approach that uses China’s desire to become a member of the WTO as “a lever to force far-reaching changes in China’s trade regime” is “unfair” and “runs the risk.” Excluding China from the WTO would “be undesirable for the future of the world trading system, China’s economic evolution, and the U.S.-China relationship.” China’s entry to the WTO would serve U.S. national interests because the “protocol governing China’s membership would not only provide for eliminating nontariff trade barriers and further reducing tariffs,” but also require that “such steps be taken on a specific schedule.” “Just as significantly, bringing China into the WTO would provide a way for the United States to address inevitable trade frictions on a multilateral rather than a purely bilateral basis.” In consequence, the United States could continue to trade with China through multilateral channels. At the same time, it could ease tensions in economic and political relations with China and avoid losing the huge Chinese market due to their bilateral trade frictions.⁷⁷

Greg Mastel, vice president of the Economic Strategy Institute, once wrote an article by claiming that leaving China and other communist countries outside the WTO “risks calling into question its credibility as a world trade organization,” as China may after all be the world’s largest economy early in the next century. Bringing all these countries into the WTO, however, could pose greater risks, says Mastel. One simple fact is that China and Russia among others “remain largely nonmarket economies.” In that event, “the United States should not allow itself to be forced into a take-it-or-leave-it decision” and “must seek more flexible and effective options than a simple yes-or-no decision.”⁷⁸

China eventually gained its WTO membership in December 2001. The CFR in October issued a report titled Beginning the Journey: China, the United States, and the WTO. Its central finding is that both the United States and China “will run risks” as Beijing moves ahead with WTO, but the “potential payoffs for both countries are well worth it.” The report also indicates “increased trade and investment will provide considerable economic benefits to both nations and thereby improve overall Sino-American relations, thus creating a better context for managing security and human rights issues.” Besides, it also warns “China’s transition into the WTO poses significant challenges for both China and the United States.” For Chinese leaders, “the chief challenge is how to manage the tension between maintaining their power and accommodating the social and political pressures arising from continued economic reform.” For the United States, “the risk lies in a political backlash if China’s entry to the WTO does not produce quick benefits to American workers and industry and if China’s trade surplus with the United States grows too rapidly.” Furthermore, the report discusses possible problems during the transition period but explains ways to resolve difficulties through cooperation. The ways include measures outside of the WTO process, such as building mutual confidence with an agreed agenda of “early harvest” accomplishments in key sectors like agriculture and information technologies; removing impediments to the renewal of U.S. trade and technical assistance to China; and developing mechanisms for “resolving mutual disputes outside the WTO process to avoid overloading the WTO.” Members of the report include Robert Hoemats, Vice Chairman of the RAND, Elizabeth Economy, senior fellow at the CFR, and Kevin Nealer, senior fellow at the Forum for International Policy, a Washington-based think tank.⁷⁹

While the conservative Heritage Foundation supported for free trade and China’s accession to the WTO in principle, it had long been pro-Taiwan. The foundation’s Robert Quinn supports Taiwan to take the lead to be a member of the WTO, disregarding Taiwan’s membership in the WTO being held hostage to PRC’s membership. “Once Taipei meets the WTO’s standards, it should be allowed to join.” Quinn maintains that Taiwan’s WTO membership would “contribute to the overall goal of trade liberalization in the Asia Pacific region.”⁸⁰

Similar to the issue of China’s PNTR status, Americans held diverse positions on China’s membership in the WTO. The EPI had been a strong opponent. When giving testimonies at a hearing before the Senate Finance Committee in September 1998, Robert Scott of the EPI stated some bad consequences—including “destroying jobs, depressing wages, hurting our competitiveness and contributing to the stagnation of real incomes”—resulted from U.S. trade deficits. By quoting one of EPI’s reports, Scott predicts “the net indebtedness of the U.S. will exceed $2.1 trillion within four years.” He then makes several suggestions, including (1) devaluating the dollar against key currencies such as the yen and the RMB; (2) coordinating macroeconomic policies with Japan and Europe; (3) attacking barriers to U.S. exports and other policies and business practices that bring “dumped and subsidized products into the U.S. market;” and (4) promoting international labor rights and environmental standards, through “aggressive agreements that are enforceable with trade sanctions, in the WTO.” Scott also recommends taking actions against currency manipulation and mercantilist deeds by some countries. He highlights, “China should not be allowed to enter the World Trade Organization until it removes all nonconforming barriers to imports, both formal and informal.”⁸¹ In May 1999, Scott argues in an article that an accession agreement between the Clinton administration and Beijing “would be harmful to workers in both the United States and China.” He points out three reasons accounting for this argument. First, “China is not yet ready to join the WTO.” “Its state-controlled economic system is protectionist, exploits labor, and represses human rights.” Second, “Chinese government’s trade policies deliberately target U.S. markets.” According to 1997 IMF data, only 10% of China’s imports came from the United States while more than one-third of its exports went to America. Third, those claims of “great benefits from bringing China into the WTO are based on wishful thinking.” “The WTO deal outlined by the U.S. trade representative in April would primarily benefit U.S. companies that invest in China while harming workers in both countries.” Scott then indicates that the United States can surely negotiate with China to work out “a better deal.” “We should (1) oppose China’s WTO membership until China agrees to include enforceable labor rights and environmental standards as core elements of the agreement; (2) assure that the agreement delivers quantifiable commercial benefits; and (3) require that it incorporate a clearly defined multilateral mechanism for enforcement.”⁸² Before the vote in Congress on China’s PNTR status, Scott argues in May 2000 in an article that the agreement between the two counties on China’s WTO membership “will accelerate job destruction in next decade with losses in every state.” If Congress approves China’s PNTR, the trade deficit between the two countries in the ten years to come will expand, resulting in “sizeable job losses in every state and in virtually every sector of the economy.” “The absolute level of the U.S. trade deficit with China will increase by at least 80% between 1999 and 2010, resulting in the elimination of 872,091 jobs during the next decade.”⁸³

On December 11, 2001, China was admitted to the WTO as the 143rd member after the fifteen-year-long painstaking negotiations. As a latecomer to the international economic system, China has already contributed greatly to the world economy and market. Besides, it plays an increasingly important role in global order. With the advent of China’s accession to the WTO, the bilateral trade between China and the United States has been on the rapid increase and China has become U.S. fastest growing export market abroad. “U.S.-China economic ties have expanded substantially over the past three decades,” says the 2011 report by Congressional Research Service, and “total U.S.-China trade rose from $2 billion in 1979 to $457 billion in 2010.”⁸⁴

3.4 Think Tanks and U.S.-China Economic and Trade Relations in the New Century

3.4.1 U.S. Trade Deficit with China

In the post-Cold War era, China-U.S. economic and trade relations becomes more interdependent despite the fact that they are sometimes bothered by domestic political factors. China was U.S. tenth largest trading partner in 1990, and now the two countries are each other’s second largest trading partners. There are nevertheless some problems facing the two countries’ bilateral trade, among which U.S. trade deficit with China has been a long debated issue and becomes the source of many frictions.

According to Chinese trade statistics, China has run a bilateral trade surplus with the United States since 1993. But U.S. data suggest that the trade surplus began ever since 1983. Moreover, they also reveal that China—following closely after Japan—became the second largest country that enjoyed trade surplus with the United States in the 1990s. China’s trade surplus exceeded Japan in 2000 and turned to be the largest trade surplus country. Washington has a wide trade deficit with Beijing if one assesses merely from trade statistics.

Growth of Trading Volume between China and US, 2001–2010 (Unit: 100 million U.S. Dollar)⁸⁵

Year	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Export to China	192	221	284	347	418	552	652	715	696	919
Changes (%)	18.3	14.7	28.9	22.2	20.5	32.0	18.1	9.5	−2.6	32.1
Import from China	1023	1252	1524	1967	2435	2878	3215	3378	2964	3649
Changes (%)	2.2	22.4	21.7	29.1	23.8	18.2	11.7	5.1	−12.3	23.1
Total (Export + Import)	1215	1472	1808	2314	2853	3430	3867	4092	3660	4568
Changes (%)	4.5	21.2	22.8	28.0	23.3	20.2	12.8	5.8	−10.6	24.8
Trade deficit with China	830	1031	1240	1620	2016	2326	2563	2663	2268	2731

Owing to different statistical approaches, the United States and China have long had discrepancies in their bilateral trade figures. According to trade statistics by the United States, its trade deficit with China is much wider than that according to Chinese statistics.⁸⁶ The gap is widening as their volume of trade is rapidly increasing. Except for the fact exports are computed by free-on-board prices and imports at C.I.F. prices, the main reason of statistical differences between the two countries is whether transit trade is added to their trading volume or not. Put differently, whether they calculating imports and exports trade volume according to places of origin accounts for their statistical discrepancies. Chinese statistics do not completely include the value of transit trade to its counterpart through export via a third party, such as the value of transit trade to the United States from the mainland via Hong Kong. But U.S. statistics add trading volume of re-imports via third parties to the United States. When measuring the value of trade of exports to China, the United States computes only its products that are directly exported to the mainland and does not count in those transited through third parties such as Kong Hong to the Chinese mainland. In order to resolve the statistical discrepancies on trading volume, the two countries held a series of consultations and discussions. In 1994 the eighth China-U.S. Joint Commission on Commerce and Trade (JCCT) established a statistical group to do a joint research. In 2004 the fifteenth JCCT established a trade statistical working group to conduct research and held discussions, and issued a Report on the Statistical Discrepancy of Merchandise Trade between the United States and China in October 2009. By comparing with the bilateral merchandise trade statistics by China and the United States in 2000, 2004 and 2006, people will find that the discrepancies of bilateral trade statistics are gradually diminishing when eliminating the influence of an expanded trade scale between the two countries. According to trade statistics by the United States, U.S. exports to China was $103.87 billion and imports from China was $399.33 billion, and its trade deficit with China was $295.46 billion in 2011.⁸⁷ But the Chinese statistics indicate that China-U.S. trading volume was $447.7 billion in the same year and U.S. exports to China was $122.2 billion, with year-on-year growth of 20%.⁸⁸ In other words, U.S. trade deficit with China was $324.5 billion during the same period.

A wide range of factors contributes to China-U.S. trade imbalance. The first factor is the industrial transfer in East Asia. In this process, China gradually replaced the region’s trade surplus with the United States. It is worth noting that foreign direct investment and materials for processing by multinational corporations in China covered the essence beneath the figures in the surface. In view of national security or intellectual property protection, the United States refused to relax export control towards China. In particular, controlling the export of high-tech products to China has been an important factor. Furthermore, Americans’ life style characterized by low saving and high consumption is the root cause of the widening trade deficit.⁸⁹

It is needless to say that China-U.S. trade imbalance is caused by various elements. Statistics and numbers per se cannot explain all problems. U.S. domestic politics, together with the rapidly growing trade imbalance, however, further intensify frictions between the two countries. Their trade imbalance had already become a debate topic of MFN status in U.S. Congress in the 1990s. In the new century, U.S. trade deficit with China became more serious particularly after China joined the WTO. On the one hand, China’s international leverage is on the increase. Chinese economy continues to grow exponentially and its trade surplus with the United States is still growing. At the same time, China becomes the largest foreign currency reserve holder. It also accumulates a large amount of U.S. treasury securities. On the other hand, Washington is suffering from a worse financial situation and piling up foreign debt. Americans felt more imbalanced particularly when comparing with their Chinese counterparts. In that event, the United States imposed greater pressures on China. U.S. gloomy economy and high unemployment in recent years have strengthened Americans’ determination to exert pressure on China. When the bilateral trading volume grows, China-U.S. trade frictions grow too.

U.S. trade deficit with China draws a lot of attention in American society and a diversity of political forces interprets the issue from various angles. Some assert that China’s unfair trade measures—including imposing barriers artificially to market access, devaluing its currency value, low wages of Chinese workers, and lack of protection of laborers in the country—contribute to U.S. trade deficit. Others hold that the mercantilist China provides export subsidies and restricts imports. They argue that U.S. trade deficit with China is the main reason explaining job losses in domestic manufacturing. Therefore, some of them recommend Washington to impose greater pressure on Beijing regarding market access, RMB exchange rate and intellectual property rights protection.

However, industrial and business groups that advocate developing trade relationship with China emphasize its significance. They contend that it is imperative to rationally face problems arising from U.S.-China trade relations. According to the report released in March 2011 by the U.S.-China Business Council, “total US exports to China rose 542%, from $16.2 billion to $103.9 billion” between 2000 and 2011. Meanwhile, the total U.S. exports to the rest of the world increased only 80%. China was then the largest export market of the United States except Canada and Mexico. “Exports to China are vital to America’s economic health and create good jobs for American workers,” argues the report.⁹⁰

Some economists of think tanks provide rational analyses of U.S. trade deficit with China. In an article published in 2003, Daniel Griswold, director of the Cato Institute’s Center for Trade Policy Studies, argues against the EPI’s viewpoint that U.S. trade deficit results in job losses.⁹¹ In October 2005, Julia Lowell, International Economist at the RAND, contends in a commentary that the points that “U.S.-China trade is benefiting China at American expense don’t hold up on close examination.” “Concerns over U.S.-China trade deficit are overblown.” As she notes, “merchandise trade balances don’t take into account cross-border trade in services, where U.S. surpluses with China are steadily increasingly.” “As China continues to develop, it will spend more money in areas such as tourism, insurance and business and financial services—all areas where American companies are highly competitive.” “Recent research has shown that official U.S. estimates of America’s trade deficit with China are overstated,” she adds. Taking another two factors—“the measurement of costs associated with shipping” and “the treatment of China’s trade through Hong Kong”—into account, the true U.S.-China merchandise trade deficit is slightly less than 75% of the official U.S. estimates. In addition, considering the structure of Chinese export industries, one should not over-concerned over U.S.-China trade deficits, as more than 55% of Chinese exports consist of processed goods assembled from imported parts and components to China and their added value is quite low. Trade between the two countries is a “classic example of comparative advantage.” Therefore, the United States cannot blame China for domestic job losses in manufacturing. Lowell makes a suggestion that in deciding what trade policies make sense for America, “the nation’s leaders need to objectively research and analyze the situation so they can determine the wisest course.” She believes that “there need not be a winner and a loser” in trade between the United States and China. “Both nations and their citizens can be winners.”⁹²

Quite similar to the above-mentioned analyses, Daniel Griswold points out that “it’s a mistake to see China as a monolithic economic rival to the United States.” While certain U.S. companies compete with producers in China, the reality is both “occupy different locations in an increasingly complex global supply chain.” Therefore, “U.S. companies are more likely to be collaborators than competitors with producers in China.” After analyzing U.S.-China cooperation of supply chains in a more globalized economy, Griswold suggests that losers from an outbreak of anti-China protectionism would be not only Chinese workers who assemble the final products, but also American consumers, workers and investors.⁹³

But there are also some think tanks scholars and experts pessimistically analyzing U.S.-China trade imbalance. The EPI’s Robert Scott might be a representative whose arguments are worth mentioning. Scott published an article titled “The Cost of Trade With China” in 1997. He alleges that U.S. trade deficit with China absorbed a vast majority of job losses and women and low-wage workers were hit hardest. Scott refers to “two primary causes” of U.S. trade deficit. The first one is “China’s complex set of formal and informal barriers to imports, complemented by numerous official discriminatory trade policies and by China’s failure to live up to its commitments under international trade agreements.” The second cause is the undervaluation of China’s currency. Following the model of export-led development practiced by Japan, Korea and Taiwan, China has been able to “accumulate immense foreign exchange reserves by intervening to depress the value of its own currency.”⁹⁴ When giving testimonies at a hearing before the Congressional Steel Caucus on June 19, 2009, Scott sates that U.S. steel industry has lost over 50,000 job since 2000. “Unfair trade practices by China and a number of other countries are responsible for a substantial share of growing international trade deficits,” he says. The low-cost Chinese steel industry threatened not only its counterpart in the United States directly, but also a wide swath of U.S. manufacturing ranging from auto and aircraft parts to machine tools, daily merchandizes, and products of industrial machinery. Meanwhile, China’s industrial expansion has been supported with vast, illegal subsidies from the government. Moreover, “China recently restored an export rebate program of 9% for many steel products, another direct and unnecessary subsidy to its exports.” In that event, Scott recommends the United States to make some measures including “aggressive enforcement of U.S. fair trade law” to tackle the challenges.⁹⁵ In another article in 2010, Scott claims that although U.S. trade deficit falls in 2009, large share of it goes to China. Blaming China for its “unfair trade practices including currency manipulation, export subsidies, widespread suppression of worker rights and wages, and tariff and non-tariff barriers to exports,” he suggests the United States “should take a leadership role in organizing an effort to end China’s currency manipulation and other unfair trade practices.”⁹⁶

The United Steelworkers Union submitted a trade case to the Office of the United States Trade Representative in September 2010 according to Section 301, and accused China of violating free trade rules of the WTO by subsidizing exports of clean energy equipment.⁹⁷ Robert Scott published a commentary immediately, in which he criticizes China on green technology trade and appeals to China to “play by the rules.” He pointes out that production of clean energy equipment had been in decline in the United States, which turned more to imports. On the contrary, “China has used widespread subsidies and other trade distorting practices to gain global dominance in a range of heavy industries.” “We cannot allow China to thwart the rules of the global trading system and control the green industries of the future,” says Scott.⁹⁸

At the hearing on “Chinese State-owned Enterprises and U.S.-China Bilateral Investment” in 2011, Scott testifies that the growing U.S. trade deficits with China “cost the United States 2.4 million jobs between 2001 and 2008 alone,” of which more than two-thirds of jobs lost were in the manufacturing sector. So the “growing trade deficits with China are the greatest threat to the future health of U.S. manufacturing.” Foreign direct investment (FDI) has played a key role in the growth of China’s manufacturing sector. Scott argues that China has used a number of activist policies to attract FDI and to “maximize exports and other benefits received from these facilities.” Measures that China adopts include devaluating of the yuan and providing a large amount of illegal subsidies to its firms. He concludes his testimonies by recommending the United States to “adopt new policies to level the playing field between the U.S. and China.”⁹⁹

Scholars from U.S. think tanks had many rounds of heated debates over U.S.-China trade ties and U.S. jobs as well as currency exchange rate and trade deficit. In a 2010 report titled Unfair China Trade Costs Local Hobs, Scott maintains that “the growing trade deficit has been a prime contributor to the crisis in U.S. manufacturing employment” between 2001 and 2008. Besides, the United States is “piling up foreign debt, losing export capacity, and facing a more fragile macroeconomic environment.” According to him, “A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation.” China intentionally makes the yuan “artificially cheap relative to the dollar, effectively subsidizing Chinese exports” and making U.S. goods less competitive. This leads to growing trade deficits, which then in return “have cost jobs in every Congressional districts.” Therefore, Scott argues that “the U.S.-China trade relationship needs a fundamental change.” The first important steps are addressing the “exchange rate policies and labor standards issues in the Chinese economy.”¹⁰⁰ This report has caused influential effect in the U.S. political field. Charles Schumer, Senator from New York, once uttered that 2.4 million jobs losses over the past seven years from 2001 to 2008 contributed to U.S. trade deficit with China. Schumer was actually drawing from Scott’s report.

Daniel Ikenson, senior fellow of the Cato Institute’s Center for Trade Policy Studies, however, puts forward different, if not opposing, ideas in an article appeared in the Wall Street Journal. “Although the Chinese currency appears to be undervalued, the evidence suggests that appreciation will not reduce the bilateral trade deficit.” He notes that the RMB rose 21% against the dollar between July 2005 and July 2008, but the trade deficit still increased to $268 billion from $202 billion during the same period. The relationship between currency and the trade deficit is “weaker than policy makers presume.” So is the relationship between the trade deficit and job loss. Ikenson holds, “EPI’s methodology is not taken seriously by most economists because it approximates job gains from export value and job losses from import value.” But it ignores the fact that imports also create or support jobs for the United States. Moreover, most of the value of products that the United States imports from China comes from “components and raw materials produced in other countries,” including the United States itself. By adding the value-added of products that assembled in China and the value from components and raw materials in other countries to the value of imports from China, U.S. trade deficits with China are thereby greatly overstated. In fact, imports from China provide jobs in the United States. Imposing tariffs on them would “penalize the non-Chinese companies and workers.” Ikenson considers these economic costs “that Congress and the president would inflict by imposing trade sanctions on imports from China.”¹⁰¹

Scott refuses to give in but insists that U.S. trade deficit hits U.S. manufacturing and causes job losses. And revaluation of the Chinese currency and appreciation of it could reduce the bilateral trade deficit. He concludes sharply that “it would be beneficial for the larger U.S. and Chinese economies” when “a 40% increase in the yuan may hurt the profits of multinational companies” of many Fortune 500 companies such as Amway, Apple Inc., Boeing, Intel, and Wal-Mart. “It’s time we put national interests before corporate interests.”¹⁰²

3.4.2 RMB Exchange Rate

China maintained a fixed-exchange rate between the RMB and U.S. dollar and other major currencies over a long period. The RMB exchange rate was once fixed at 2.5 yuan or 1.5 yuan per dollar, which obviously overvalued the value of Chinese currency. The exchange rate has fallen after China’s reform and opening up in the 1980s. It turned to 8.62 yuan per dollar in 1994 and had been steadily maintained at 8.27 yuan per dollar from 1997 to 2005. The RMB has been gradually appreciating against U.S. dollar since China’s currency exchange rate reform in 2005.

In the context of the increasing U.S. trade deficit with China, some American politicians began to shift their attention from market access, government subsidies, tariffs, intellectual property rights protection, and etc., to the RMB exchange rate. It gradually became a heatedly debated issue in the United States and more serious in U.S. political field as the trade imbalances between US and China widened.

The eruption of U.S. financial crisis severely hit the U.S. economy, resulting in high unemployment and rise of protectionism. Besides, it exacerbated U.S.-China trade disputes and the RMB exchange rate issue loomed large. How to step out of the deep recession has been the first priority for Barack Obama when he assumed presidency in the White House. When delivering State of the Union address on January 27, 2010, President Obama set a new goal for the export promotion for doubling U.S. exports in five years, aimed at supporting two million jobs. Upon the release of the report, the RMB exchange rate issue became the focus of attention in America again. Some politicians criticized that the undervaluation of the RMB exchange rate was the major cause of U.S. trade deficit with China, which contributed to U.S. job losses.

A number of Americans share the view that “the Chinese jobs being preserved by an artificially low currency come at the expense of American jobs.” Generally there are three explanations for the argument. The first one is that “a stronger currency would increase the purchasing power of Chinese consumers and decrease the relative cost of American goods in China, spurring more Chinese to buy more American products.” The second is that “a stronger currency increases the relative cost of Chinese goods in third markets, like Europe or Latin America.” This would lead to consumers’ purchase of U.S. products instead of Chinese ones. Lastly, “a stronger currency would increase labor costs in China, making it less attractive for American companies to move jobs to China and thus keeping more people employed at home.”¹⁰³

Some interest groups doubled their efforts to lobby Congressional members and Congress also attempted to impose pressures through legislation. Some Congressional members had kept proposing bills directing against the Chinese currency exchange rate since 2005. Charles Schumer, Democratic Senator from New York, and Lindsey Graham, Republican Senator from South Carolina, introduced a new bill in Congress in April 2005. The bill allows for a 180-day negotiation period for China and the United States to revalue the Chinese currency. If the negotiations fail, then a penalty Tariff of 27.5% will be applied to all Chinese products imported to the United States. The bill was passed in May 2005 in Senate. House approved another similar bill in 2010. Although the two bills failed to pass in both Senate and House, Schumer and Graham along with some other fourteen Senators jointly introduced the Currency Exchange Rate Oversight Reform Act of 2010 in March 2010, which was passed in Senate on October 11, 2011. At the same time, the administration began to complain that Chinese devalued the yuan so as to stimulate export and obtain huge trade surplus. Even though U.S. Department of the Treasury—either under the George W. Bush or Barack Obama administration—did not list China as “currency manipulator” in the biannual report to Congress, the U.S. government constantly exercised pressure on China. Washington asked Beijing to reduce interventions of its currency and have the market to value it so that the RMB would have more space to appreciate.

The U.S. Omnibus Trade and Competitiveness Act of 1988 requires the Treasury Secretary to provide semiannual reports on the international economic and exchange rate policies of U.S. major trading partners. These partners include China, Japan, South Korea, Eurozone and some other economies, whose total trade volume occupies 70% of U.S. foreign trade. According to the Section 3004 of this act, the Treasury Secretary must “consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”¹⁰⁴ The George W. Bush administration did not perceive China as a currency manipulator. Nor did the Obama administration. On December 28, 2011, U.S. Department of the Treasury released the latest Report to Congress on International Economic and Exchange Rate Policies. The report criticizes China for its slow reform in currency exchange rate and argues that China has intended gaining unfair trade advantage in global market by artificially undervaluing its exchange rate. But it does not label China a currency manipulator. Instead, U.S. Department of the Treasury highlights the significance of Chinese market to U.S. economy. The report reveals that the RMB has appreciated by a total of 7.5% against the dollar since Beijing’s decision to allow a more flexible currency in June 2010. Taking into account the higher rate of domestic inflation in China than that in the United States, the RMB has appreciated against the dollar on “a real, inflation-adjusted basis by nearly 12% since June 2010 and nearly 40% since China first initiated currency reform in 2005.” Even so, the report asserts that the real exchange rate of the RMB is persistently “misaligned and remains substantially undervalued” because of “China’s long-standing pattern of foreign reserve accumulation, the persistence of its current account surplus and the incomplete appreciation of the RMB, especially given rapid productivity growth in the traded goods sector.” The report claims that it “is in China’s interest to allow the exchange rate to continue to appreciate” and the “lack of continued appreciation by China would prevent the exchange rate from serving as a tool to encourage consumption so as to maintain strong, sustainable growth.” It concludes, “Treasury will continue to closely monitor the pace of RMB appreciation and press for policy changes that yield greater exchange rate flexibility.”¹⁰⁵

Americans have reached somewhat consensus on the exchange rate of the RMB while diverse viewpoints can also be heard. Generally, a large number of economists share the view that the Chinese government manipulates its currency and not let market to value it. But Americans are divided on the reasonable exchange rate, effects on U.S. trade deficit, countermeasures and approaches to influence China’s policy change. Some believe that China keeps a close eye on the dollar so that it could gain unfair trade interests from U.S. consumers. However, some other economists assert that Americans’ consumption habits and low savings contribute to U.S. trade imbalances.¹⁰⁶

Many think tanks provided theoretical analyses and policy recommendations for policy makers on the issue of the Chinese currency. They held seminars and discussions regarding Chinese exchange rate and U.S. trade deficit with China. In July 2006, Americans still remained divided on U.S.-China trade issues one year after China’s reform of the exchange rate regime. Some critics contend, “China’s yuan remains grossly undervalued, bestowing an unfair advantage on imports from China at the expense of U.S. producers.” Others argue, “[Benefits] from trade with China far outweigh any concerns about its currency.” This therefore gives birth to three policy recommendations. They are, namely, “doing nothing,” “aggressive diplomacy,” and “imposing steep tariffs on Chinese imports.” The Cato Institute brought together three experts to discuss the Chinese currency at a policy forum under the name of “U.S.-China Trade, Exchange Rates, and the U.S. Economy” in July 2006. Except for the Cato Institute’s Daniel Griswold, the forum invited two experts, Nicholas Lardy of the IIE and Frank Vargo of the National Association of Manufacturers. They discussed the status of reform in China, the impact of U.S.-China trade and exchange rates on U.S. economy, and U.S. economic policy toward China.¹⁰⁷

The PIIC maintains that the devaluation of the RMB has undoubtedly affected or even controlled the debate over the Chinese currency exchange rate. Fred Bergsten and Nicholas Lardy as well as some other experts explained China’s currency undervaluation by publishing articles, receiving interviews and giving testimonies before Congress. When testifying at a hearing before the Senate Committee on Finance in March 2006, Bergsten contends that U.S. trade deficit is related to currency and there is a space for “an increase of 20–40% in the value of the RMB.” He thinks that “China should adopt a more flexible exchange rate that will respond primarily to market forces” in the long term. He also suggests the United States to adopt new policy approach by taking advantage of Chinese President Hu Jintao’s upcoming visit to the United States in April. “One cardinal requirement,” he argues, “is for the administration and Congress to adopt a unified, or at least consistent, position.” They should avoid that one acts like a “good cop” while another a “bad cop.”¹⁰⁸ In a hearing before House Ways and Means Committee in March 2010, Bergsten makes clear that the Chinese RMB “needs to rise by about 20% on a trade-weighted average basis and by about 40% against the dollar.”¹⁰⁹ He claims that the Chinese authorities “buy about $1 billion daily in the exchange markets to keep their currency from rising and thus to maintain an artificially strong competitive position.” So some neighboring countries also maintain currency undervaluation so as to avoid losing competitive position to China. This competitive undervaluation of the RMB is a “blatant form of protectionism,” he observes. It equals to subsidize all Chinese exports about 25–40% and “equates to a tariff of like magnitude on all Chinese imports.” In that event, he believes that the United States and other countries’ countermeasures should be regarded more exactly as anti-protectionism. According to Bergsten, “China’s exchange rate policy violates all relevant international norms” and makes an important contribution to U.S. trade deficit with China. Once the RMB were appreciated by 25 to 40%, then the current U.S. account deficit would be reduced $100 billion to $150 billion. Besides, the balance between imports and exports would also produce more jobs in the United States. Bergsten calls it “the most cost-effective step” to reduce the current unemployment rate in the United States. In spite of the fact that China appreciated its currency from July 2005, it is far from enough and Americans’ expectations of “a substantial increase in the value of the RMB is thus clear and overwhelming.” He then provides three recommendations for the administration. The first one is to label China a “currency manipulator” in the 2010 foreign exchange report to Congress. The second is to “seek a decision by the IMF … to launch a ‘special’ or ‘ad hoc’ consultation to pursue Chinese agreement to remedy the situation promptly.” And the third one is to “ask the WTO to constitute a dispute settlement panel to determine whether China has violated its obligations” and “recommend remedial action.” Finally, Bergsten notes “China’s competitive undervaluation represents a subsidy to all exports and a tariff on all imports.” Thereby a “comprehensive response via the exchange rate” is required. As it takes unilateral actions, the United States also needs to use the most effective strategy on IMF and WTO dimensions.¹¹⁰ In an article appeared in the Financial Times in October 2010, Bergsten contends that China continues to manipulate the RMB to the extent that it is now undervalued by at least 20 per cent. He thus suggests a new policy instrument he calls “countervailing currency intervention” so as to force the RMB to appreciate against the dollar.¹¹¹ A new report by PIIE in November 2011 estimates that the appreciation of the RMB against the U.S. dollar has narrowed the undervaluation of the Chinese currency from 16% in April to 10.6% in late October while the dollar remains overvalued about 9%.¹¹²

Some other think tanks also share the same viewpoints that PIIE holds. Desmond Lachman, Fellow at the AEI, argues in a 2007 commentary that China’s currency is “grossly undervalued.” He blames U.S. Treasury Secretary Hank Paulson for doing nothing but “refuses to deem China a currency manipulator” so that “China’s trade surplus with the United States continues to grow like Topsy.”¹¹³ Christian Weller, senior economist at the Center for American Progress, who once worked at the Department of Public Policy of the AFL-CIO in Washington, D.C., publishes in more than 100 journals. The press frequently quotes his viewpoints and works. He is also a regular guest appearing on TV and radio programs.¹¹⁴ He holds that U.S. trade deficit could be reduced and exports be stimulated greatly through proactive communications with China on the issue of currency manipulations. More jobs particularly for the manufacturing would also be produced.¹¹⁵

The EPI maintains a close relationship with labor unions in the United States. Via releasing research reports, hosting lectures and seminars, granting interviews as well as issuing commentaries, the EPI contends that Chinese government’s manipulations of its currency contribute to U.S. trade deficit and recommends U.S. government to take some necessary countermeasures. When presenting testimonies before U.S. House Committee on Small Business on April 26, 2006, Robert Scott criticizes China for U.S. trade deficit and suggests U.S. Treasury to declare China’s currency manipulation and begin negotiations with China.¹¹⁶ A report titled China Manipulates Its Currency—A Response Is Needed was released by the EPI in that September. The report maintains that China’s manipulation of the RMB “has been a primary contributor to the enormous run-up in the American trade and current account deficits” and also a principal reason for the global trade imbalances. “For the sake of stability in the U.S. economy, the Chinese economy, and the global economy,” as the report argues, “action needs to be taken to begin unwinding these imbalances.”¹¹⁷

The RMB was obviously appreciating against U.S. dollar in 2011. However, according to Eswar Prasad, senior fellow at the Brookings, “China’s central bank continues to intervene massively in foreign exchange markets to keep the yuan’s value stable, suggesting the currency is still significantly undervalued.” He then concludes that the intervention by the Chinese government “boosts the stock of international reserves by about $200 billion each quarter, adding to the government’s headache as this inevitably means more purchases of U.S. treasures.”¹¹⁸

Paul Krugman, Nobel laureate in economics and professor of economics and international affairs at Princeton University, also joined the debates and consolidated the argument that the RMB had been undervalued. As a columnist of the New York Times, Krugman’s opinions in recent years expressed at the newspaper on China’s currency drew plenty of attention in American society. In an article appeared at the New York Times on December 31, 2009, he claims that Chinese mercantilism helps to maintain the huge trade surplus artificially. He contends that China’s predatory policy may reduce U.S. employment by around 1.4 million jobs. He also warns, “Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation.”¹¹⁹ Krugman blames China again in March 2010 for its policy becoming a “significant drag” on global economic recovery and suggests doing something for this. He quotes some people’s complaints that China was since around 2003 “selling renminbi and buying foreign currencies” to “keep the renminbi weak” and its “exports artificially competitive.” Consequently, “China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves” by 2010. “The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion—10 times the 2003 figure.” Krugman contends that China’s policy of currency manipulation “seriously damages the rest of the world.” He suggests that U.S. Treasury Department “stop fudging and obfuscating” but take a clear position. Washington does not need to be afraid if China sells a large share of U.S. assets. If China does, “the value of the dollar would fall against other major currencies.” But it at the same time would be “a good thing” for the United States because it would make U.S. goods more competitive and thus reduce U.S. trade deficit. It would be “a bad thing” for China since Beijing “would suffer large losses on its dollar holdings.” The United States imposed a temporary 10% surcharge on imports in 1971 so as to force Germany, Japan and other nations to raise the dollar value of their currencies. Krugman suggests imposing a 25% surcharge on imports from China in exchange for China’s concessions on the RMB issue.¹²⁰ In the article titled “Holding China to Account,” Krugman points out, “given our economy’s desperate need for more jobs, a weaker dollar is very much in our national interest—and we can and should take action against countries that are keeping their currencies undervalued, and thereby standing in the way of a much-needed decline in our trade deficit.” In the light of the recent U.S. economic crisis, Washington should take actions to hold China accountable and contributes to a solution to the crisis.¹²¹

However, a number of China experts serving U.S. think tanks hold different viewpoints on China’s currency. They don’t think that the undervaluation of the RMB results in U.S. trade deficit and job losses. First, there is no necessary connection between the appreciation of the RMB and U.S. exports. As evidenced by some recent researches, the RMB appreciated by 21 percent against the dollar from July 2005 to July 2008 while U.S. trade deficit with China increased fast during the same period. The main reason behind this is that most of U.S. exports to China are technology-intensive products; their techniques, quality, services as well as prices are crucial elements affecting the trade. Americans need to compete with their European and Japanese counterparts. So the U.S. dollar exchange rate to the Euro and Japanese yen, rather than the exchange rate of the RMB, becomes an important factor that influences the trade. Second, “the U.S. economy and the Chinese economy are highly complementary” so that they don’t need to compete against each other in market of any third country. For example, the United States sells airplanes and pharmaceuticals while China exports electronic and textile products. Third, although the RMB appreciates, the jobs lost would not come back to the United States again. Conversely, the United States will attempt to import labor-intensive products from low-wage countries such as Vietnam and Indonesia when the RMB appreciates and prices of Chinese exports increase. So the dire situation of U.S. trade imbalances cannot be improved, nor can the employment of jobs be increased in American society. In effect, it will exacerbate lower- and middle-income families in the United States. Therefore, some U.S. think tanks hold the view that the United States should talk with China concerning Chinese currency exchange rate. But they do not agree to place exchange rate issue on the priority list on the agenda of the two countries. They believe that education, transportation, governmental affairs, basic sciences as well as applied research could contribute more, instead of forcing China to yield to the United States on exchange rate, to the resolution of challenges facing U.S. economy.¹²²

In 2005, Albert Keidel, the then senior associate at the Carnegie, who once worked in U.S. Treasury Department and the World Bank, argues that “the RMB is not undervalued” by any reasonable economic measure. “China does have a trade surplus with the United States, but it has a trade deficit with the rest of the world,” he says. “And China’s acumination of dollar reserves is not the result of trade surpluses, but of large investment flows caused in part by speculators’ betting that China will yield to U.S. pressure.” “If the United States wants to improve its economy for the long haul, it had best look elsewhere beginning with raising the productivity of American workers,” he adds.¹²³ In the commentary titled “Cost of unleashing China’s currency” appeared at the Christian Science Monitor in 2007, William Overholt, China expert and director of the Center for Asia Pacific Policy at the RAND, and Pieter Bottelier, former Chief of the World Bank Resident Mission in China and professor of SAIS at Johns Hopkins University, examine consequences of Chinese currency appreciation. “The low savings rate by Americans means the US will continue to have a large global trade deficit,” they say. “Forcing Chinese currency appreciation will just shift the deficit to other countries.” Congress’s obsession with the Chinese currency is “the least important source of the US trade deficit.” They believe that the appreciation of the RMB will not reduce U.S. global trade deficit significantly or create more job opportunities for Americans. “Completely freeing China’s currency and capital flows could backfire.” As they predict, “if China suddenly stopped intervening in the foreign exchange market, it might trigger a sharp short-run decline in the international value of the US dollar and drive up US interest rates.” And this could “cause a housing market collapse and a recession.” The commentary reaches a conclusion that the well-intentioned proposals to “protect the US economy from foreign goods can backfire.” “A protected US economy would be, like France’s, an economy of far higher unemployment.”¹²⁴ In a seminar on China’s economy after the financial crisis held by Carnegie in 2010, the exchange rate of the RMB was debated heatedly. Albert Keidel, now senior fellow at the Atlantic Council, argues that no evidence suggests that China is manipulating currency for its own interest, in particular when its trade surplus greatly diminishes. Pieter Bottelier holds a similar view that the Chinese government maintained a stable exchange rate of its currency while other major currencies were devaluing against the U.S. dollar after the global financial crisis precipitated by Lehman Brothers. If China did control its currency, it should have depreciated the RMB against the dollar and gained profits from it. But China did not do that.¹²⁵

Some members of Congress criticized China’s currency policy, blaming it for damaging U.S. manufacturing and restricting U.S. exports and thereby giving rise to the growing trade deficit with China. Daniel Griswold is a critic of these claims. In a 2006 article titled “Who’s Manipulating Whom? China’s Currency and the U.S. Economy,” he criticizes the argument that China’s currency manipulation depresses U.S. manufacturing output and destroys U.S. jobs. First, China maintains a fixed-rate currency. And there is nothing wrong with it. Actually, the United States and some other major Western industrial countries fixed their currencies from the 1950s to the early 1970s. There are 89 out of 187 countries still maintain the fixed currency today. The Chinese government was praised by the international community for holding its currency steadily during the Asian financial crisis in 1997. Second, imports from China are not the primary cause of the decline in U.S. manufacturing jobs since 2000. While U.S. manufacturing suffered from the “painful recession” from 2000 to 2003, real output of U.S. factories has increased by 50 percent since 1994, while China maintained the fixed currency during that period. “If China were to move toward a more freely floating currency, evidence and experience suggest it would not have a noticeably positive effect on U.S. manufacturing, employment, or the bilateral trade balance with China.” Furthermore, critics of Chinese currency manipulation “overlook the huge benefits to Americans from trade with China.” Most of U.S. imports from China are consumer goods for daily use and they improve lives of Americans at home and in office. Moreover, “China is now a major market for U.S. companies and an important source of capital for the U.S. economy.” Lastly, punitive and unilateral sanctions imposed by the United States against imports from China with regard to China’s foreign currency regime would be a “colossal policy blunder.” These sanctions would hurt Chinese producers and workers. They would increase prices of products and then hurt millions of Americans. Sanctions would also “disrupt supply chains” in East Asia, “invite retaliation” and “jeopardize sales and profits for thousands of U.S. companies” that are conducting business with China. Griswold argues, “America’s commercial relationship with China is not a crisis that demands urgent action on the part of the U.S. government.” But he suggests the Chinese government to “move steadily toward a more flexible currency,” which will eventually lead to a floating currency. On the other hand, U.S. government should provide technical support for China to help maintain a more flexible currency regime. “Those policies should be implemented, not through the heavy-handed threat of trade sanctions, but through diplomacy, cooperation, and negotiation based on a firm understanding of the mutual gains from trade,” says Griswold.¹²⁶

In a commentary appeared at the Washington Times in 2010, Griswold criticizes some wrong arguments held by critics in the United States by employing some statistical data. He admits that as most less-developed nations do, “China’s central bank does tightly manage the value of its currency in the foreign-exchange market.” Moreover, an “undervalued currency does make a nation’s exports more competitive while making imports more expensive.” These claims, however, are “widely overvalued” by critics and “do not justify any resort to higher tariffs against Chinese goods.” “Exchange rates have only limited effects on bilateral trade balances and can be swamped by more fundamental factors,” observes Griswold. The United States having a huge trade deficit with China is “not because of an undervalued yuan.” It is because China specializes in making consumer goods … that American consumers love to buy” and U.S. national savings rate is quite low.¹²⁷

Research fellows and experts of the Cato Institute and the CSIS and some other think tanks testified before Congress. They elaborated the issue of Chinese currency exchange rate and provided policy recommendations. When testifying before House Committee on Ways and Means in October 2003, Griswold stated, “imposing tariffs on Chinese goods in the name of helping U.S. manufacturing would be a disaster.” It equates to “a direct tax on American working families, especially those on modest incomes.” It would also “drive up costs for U.S. companies that depend on parts, supplies, and other goods from China to remain competitive in global markets.” Moreover, it “would reduce demand for U.S. exports and for U.S. Treasury bills, depressing domestic production and driving up interest rates.” Equally important, punitive tariffs aimed at China would sour U.S. relations with such an important country when Washington is wrestling with global terrorism and North Korea’s nuclear ambitions. “Pressing China to readjust or float its currency poses dangers of its own,” he says. “If China were to move too rapidly toward free capital flows and a floating currency, it would precipitate a collapse of its banking system, the flight of billions in savings, and a rapid depreciation of its currency.” He also warns that Americans could “soon regret getting what we asked for.”¹²⁸

Daniel Ikenson of the Cato Institute claims that the relationships between the undervaluation of RMB and U.S. trade deficit and job losses are “weak” by drawing on some recent evidence when giving testimonies before U.S. Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy in 2010. He rebukes the views that RMB undervaluation has caused high deficit of U.S. trade with China and loss of job opportunities. For him, “The world would be better off if the value of China’s currency were truly market-determined, as it would lead to more optimal resource allocations.” However, “compelling China to revalue under threat of sanction could produce adverse consequences—including reductions in Americans’ real incomes and damaged relations with China—leaving us all worse off without even achieving the underlying policy objectives.” Ikenson concludes that “it would be better to let the storm pass and allow China to appreciate its currency at its own pace” at the present moment.¹²⁹

On September 16, 2010, Charles Freeman, III, director of Freeman Chair in China Studies of the CSIS, testified before Senate Banking Committee and talked about Chinese currency as well as U.S. Treasury Department’s Report on international economic and exchange rate policies. As he contends, “the commercial relationship between the United States and China has been an important area of common interest that has reduced bilateral tensions between two countries.” He also mentions challenges, including intellectual property rights protection, market access, and international free trade that China’s rise brings about. “In order to genuinely combat the challenges faced by American companies and their workers in the China market, the U.S. government and our companies will need to increase the sophistication of their approach to the marketplace.” Given that Chinese society is complex and diverse and is short of consensus, U.S. government and companies should develop alternative strategies and tactics for advancing their commercial interests.¹³⁰

Some experts oppose to impose sanctions against China with regard to the RMB exchange rate. Arthur Kroeber, nonresident senior fellow at the Brookings, puts forward two implications for U.S. policy on the issue. The first one is that “China’s exchange-rate policy is deeply linked to long-term development goals” and any other outside actor including the United States can do little to influence this policy. The second is that “the same suspicion of market forces that leads Beijing to pursue an export-led growth policy that generates large foreign reserve holdings also means that Beijing is unlikely to be willing to permit the financial market opening required to make the RMB a serious rival to the dollar as an international reserve currency.” Since it lacks any effective leverage, the United States cannot accelerate the pace of RMB appreciation by imposing high-profile pressure. He recommends that “U.S. policy should therefore de-emphasize the exchange rate” and it should “focus on keeping the pressure on China to maintain and expand market access for American firms in the domestic Chinese market—which in principle is provided for under the terms of China’s accession to the World Trade Organization.”¹³¹ Chad Bown, Non-resident Fellow at the Brookings, argues that U.S. trade policy toward China is “likely to have complex effects on global trade flows and may produce outcomes far different from those intended.” He asserts that discriminatory trade restrictions are costly in terms of overall national and global welfare. “Perhaps more surprisingly, they may be ineffective or even counterproductive in protecting production and workers in the affected domestic industries.”¹³²

The Chinese government announced to reform the currency exchange rate regime and allow more flexibility in the RMB’s exchange rate in June 2010. A number of U.S. politicians expect that the RMB could appreciate against the U.S. dollar so that Chinese exports are more expensive and Chinese consumers will thus buy more imports and finally reduce U.S. trade deficit. Robert Pozen, non-resident senior fellow at the Cato Institute, disagrees with these claims. Rather, he argues that the value of the yuan is not the “main driver of the U.S. trade deficit.” “The wages and social safety net of Chinese workers are more important” because higher wages not only increase the cost of cheap products but also contribute to higher consumption. Therefore, he suggests that American politicians should not push so hard for yuan appreciation because it would be provoke China’s resistance and thus is counterproductive. “Instead, they should support higher wages and a stronger safety net for Chinese workers,” he says. “These measures would not only help reduce the U.S. trade deficit but also would be consistent with recent efforts of China’s officials to improve the living standard of its workers.”¹³³

3.4.3 Intellectual Property Rights Protection and Innovative Capabilities

Intellectual property remains a long-term issue for China-U.S. relations. Realizing the importance of intellectual property rights protection (IPRP), Chinese government has adopted a wide range of measures to protect intellectual property rights (IPRs) and made a large amount of progress. But the United States continues to blame China for its ineffectiveness in IPRP. Washington repeatedly imposed pressure on Beijing with threat of sanctions. In August 2007, U.S. Trade Representative (USTR) Susan Schwab sued China for its violations against the Uruguay Round Agreement on Trade-Related Aspects of Intellectual Property Rights. She asked the WTO to set up a group to deal with U.S. demands for the accusation of China’s infringements against the IPRs. Prior to this, USTR always listed China as one of key IPRs violators, and this was the first time that USTR had sued China for violations against IPRs agreement within the WTO framework. Besides, at the request of Senate Committee on Finance, U.S. International Trade Commission submitted two investigation reports in 2010 and 2011. They assessed the effects of China’s infringements against IPRs and independent innovative policy on U.S. economy.¹³⁴

U.S. think tanks turned their attention to the issue of IPRs in U.S.-China economic and trade relations a long time ago. Senator Spencer Abraham cited research by James Dorn of the Cato Institute when speaking at Senate. Dorn observes the piracy of IP is a “serious” issue for Western firms. China should comply with relevant regulations and laws. Its accession to the WTO is conditioned on its adherence to international law. “Using economic sanctions to punish pirates sounds good in theory, but in practice sanctions are seldom effective,” says Dorn. “The real solution to piracy may have to wait for technological changes that make it very costly to steal intellectual property.” Perhaps it has to “wait for the rule of law to evolve in China and other less-developed countries.” Chinese people and firms will demand new laws concerning IPRP when China itself advances its IP. China will harm itself in the long haul if it fails to protect its property rights. “Investors will not enter a market if they cannot reap most of the benefits of their investments.”¹³⁵

In his testimonies before the U.S.-China Economic and Security Review Commission on May 19, 2005, William Overholt, director of Center for Asia Pacific Policy and Asia Policy Chair at the RAND, argues that Chinese “theft of intellectual property has become a major issue.” But he notes that some other developing countries such as Japan and Singapore were once presenting similar problems as China does today. He also says that there are not many differences between China and India and Russia in terms of IPR practices. It is “the scale and efficiency of China, and the extent of foreign direct investment in China” that make the issue a larger one. Overholt then concludes that “to make very strong representations about IPR abuses” and “to implement policies that punish bad behavior and reward better behavior” are appropriate. “It is also useful to maintain a certain historical perspective.”¹³⁶

When talking about how to create jobs for the Obama administration in September 2011, Fred Bergsten suggests the administration to “weaken the dollar by 10 to 20 percent” and impose greater pressure on China to accelerate its currency appreciation. Besides, the United States should expand foreign market for its service sector and eliminate trade barriers. Moreover, U.S. government “must get serious about defending the intellectual property sights of our companies against theft by foreign companies and governments.” Bergsten refers to a study by the International Trade Commission, suggesting that Chinese companies alone, with support or at least acquiescence from their government, are “stealing $50 billion to $100 billion in United States products each year.” These products include Microsoft Windows, Apple iPads, and award-winning films. Since negotiations failed to achieve much progress, Bergsten recommends taking many more intellectual property cases to the WTO and credibly threaten unilateral retaliation if the foreign piracy continues.¹³⁷

Massive foreign direct investment has brought technology and capital into China and advanced the astonishing development of Chinese economy. Chinese companies are competitive in producing “low-value, labor-intensive goods.” With its fast development over the past decades, Chinese competitiveness is not confined to traditional areas. China obtained foreign technologies and now becomes a strong competitor to companies of the developed countries. Besides, Chinese government also takes some measures to greatly advance its innovative capabilities. The Freeman Chair in China Studies of the CSIS argues that both the United States and Japan need to have a better understanding of the nature and scope of China’s competitiveness in key technological areas and the current situation of China’s competitiveness policies. Objectively assessing China’s dependence on the United States and Japan helps reduce the risk of miscalculations and can also pave the way for developing a sound bilateral relationship in future. Furthermore, “identifying relevant U.S. and Japanese policies or strategies to encourage China to integrate into the liberal and open market economies could enlarge possibilities of the world.” Taking into account these factors, a project of the Freeman Chair in China Studies “will focus primarily on the nature of Chinese competitiveness in key technology areas, as well as lessons for the United States and Japan.” Its work “aims to assess Chinese competitiveness, understand Chinese policy making on competitiveness issues, identify areas in which Chinese competitiveness relies on U.S. and Japanese companies as well as U.S. and Japanese policies that might affect Chinese competitiveness, and provide future direction for U.S. and Japanese policies to keep their competitiveness in face of the rise of China.”¹³⁸

3.5 Brief Summary

U.S. political pluralism provides some prerequisites for the rise, development and flourishing of think tanks. Think tanks are active in U.S. China policy, particularly in the controversial trade policy toward China.

Think tanks are not engaged in decision making directly. Rather, they are dedicated to providing diverse perspectives for policy makers. Except crisis decision-making, the process of decision making in the United States is characterized by concerted efforts and compromises by various forces. It is more specific on issues concerning U.S. foreign trade. In the context of globalization, China-U.S. trade relationship becomes closer than ever. Economic and trade issues not only affect global, regional, and bilateral relations, but also influence U.S. investment, trade, production, and sales. Other political forces are involved in impacting on economic and trade issues. But U.S. Congress is best qualified to speak on these issues. Besides, interest groups also participate directly in the process. In the view of their own interests and demands, multinational corporations, small and medium-sized enterprises, labor groups as well as human rights organizations attempt to play a role in influencing policymaking. The involvement of these forces turns economic and trade issues between China and the United States to be ones that beyond economy and trade per se. Instead they become issues that combine political, economic, diplomatic, and strategic factors. In fact, the bilateral trade issues have linked domestic and international levels. The Chinese government always proposes not politicizing China-U.S. economic and trade issues. It is nevertheless not easy for the United States to do what China anticipates. U.S. China policy, in particular U.S. economic and trade policy toward China, is controversial. But think tanks do not have stakes involved in the policy in the surface. They tend to take a neutral position. Therefore, the roles that think tanks play are more decisive on economic and trade issues.

It should be noted that think tanks are merely one factor underlying the decision making of U.S. foreign policy. Through their independent research findings, think tanks keep the public and U.S. government informed about their positions and viewpoints on U.S.-China relations. They play a role of providing policy recommendations in both direct and indirect ways to affect the perspectives that the public and decision makers have on diverse issues. Given the significance of China and its importance to the United States against the backdrop of China’s rise, a growing number of think tanks in America double their efforts in China studies. Desire to cooperate with and compete against each other among think tanks exist at the same time. Their positions on China vary from different issues due to the diversity of ideologies, party affiliation as well as funding sources. It is partial to conclude that a policy is completely driven by a certain think tank. It is true that U.S. government adopts suggestions by one or two think tanks regarding some specific issues. More frequently, however, it is those mainstream consensuses that are shared by a majority of think tanks are finally adopted by decision makers. Think tanks as a whole are a crucial component for U.S. economic and trade policy toward China. It is difficult to measure think tanks’ influence or their influence on certain issues. But it is widely believed that adequate discussions among think tanks facilitate policymaking. Furthermore, think tanks’ interpretations or assessment of policies advance the understandings and perceptions for the public and thus strengthen or weaken the domestic foundations of U.S. China policy.

As mentioned above, think tanks’ influence varies from one another due to their diverse ideologies. In spite of their adherence to research independence, think tanks have different ideologies and these differences inevitably affect their influence on U.S. economic and trade policy. For example, the AEI, the Heritage Foundation and the Cato Institute among others are more conservative. They underscore free trade and expansions of foreign market and oppose too much government intervention. On trade issues, these think tanks tend to believe trade with and investment in China could bolster its reform and help to integrate China into the international community that the United States leads. They support U.S. government to develop trade relations with China and China’s accession to the WTO. On the other hand, they demand “fair trade” from China and propose imposing greater pressure on China on issues such as IPR protection and market access so as to expand foreign market for U.S. exports and investment. Their claims became much stronger after China’s entry to the WTO in the new century. Liberal think tanks, represented by the EPI, maintain a close relationship with U.S. labor organizations as well as human rights groups. They lay emphasis on labor rights and environmental protection, in particular the protection of U.S. domestic employment. So they advocate pressuring China concerning U.S. trade deficit with China, labor, and human rights. These claims receive more recognition from American society in the context of a gloomy economy with high unemployment. In fact, liberal think tanks tend to support anti-globalization and trade protectionism claims. The two American political parties, i.e., the Republican and Democratic Parties, hold the same claims with regard to policy ideas, respectively. The Republicans have a close relationship with large enterprises and corporations while the Democrats are intimately connected with low- and middle-income families. Labor organizations are vital supporters of the Democrats. Think tanks’ influence grows when their policy ideas are compatible with decision makers’ ideologies. Otherwise policy recommendations by think tanks are not likely to be recognized or accepted by decision makers. In that event, these think tanks can hardly affect the policymaking process. In other words, the influence of the EPI and some other liberal think tanks grows when a Democratic President is in office. When Republicans assume presidency in the White House, however, conservative think tanks have more place to exert their influence on U.S. administration. As evidenced by U.S. history, the Republican administration under George W. Bush followed a free-trade policy and therefore repeatedly vetoed the domestic claims of trade protectionism. But under the Democratic administrations of Bill Clinton and Barack Obama, liberal think tanks are comparatively more influential.

On balance, neither should people overestimate nor underestimate the influence that think tanks have on U.S.-China trade relations. Think tanks are not directly involved but playing an invisible role in the decision making process of U.S. China policy. Therefore, it is difficult to accurately evaluate their influence. Moreover, think tanks are merely one factor in the process since all kinds of interest groups attempt to affect the administration regarding economic and trade issues. Furthermore, perspectives and standpoints that think tanks have are distinct, even opposing, from one another. Discrepancies and competition among think tanks also whittle down their influence on public policy. It should be noted, however, that in-depth research on think tanks can facilitate our better understandings of the decision making process of U.S. China policy, including its economic and trade policy toward China.