- NBR - The National Bureau of Asian Research

Redefining U.S.-China Economic Relations

Nicholas R. Lardy

In the immediate aftermath of the Tiananmen tragedy of June 1989, the United States, other members of the Group of Seven, and other Western countries imposed a variety of economic sanctions against China. They included the suspension of a planned further relaxations of COCOM (Coordinating Committee for Multilateral Export Control) restrictions on the sale of high-technology products to China; holding up approval of new loans from international organizations such as the World Bank and the Asian Development Bank (ADB); and the suspension of the negotiations that were expected to lead to China's accession to the General Agreement on Tariffs and Trade (GATT). These and other economic sanctions were imposed largely to register disapproval of the slaughter of unarmed Chinese citizens by the Chinese armed forces. But they were partly justified by the argument that China had abandoned the promising path of economic reform on which it had been embarked for more than a decade. As a result, it was argued, China was no longer entitled to all of the privileges normally accorded to members of the international economic system.

I believe that two years later it appears there was much less retrogression in economic reform after the Tiananmen tragedy than was perceived at the time. Reform has continued on a broad front, and in certain key areas it has actually accelerated. The evidence presently available reveals that China's economic reform program not only continues to be far more successful than that of the Soviet Union but in many ways continues to lead even the reform efforts of the formerly socialist states of Eastern Europe. Many aspects of China's reforms are of great relevance even for the states that have overthrown their communist parties but seem economically paralyzed, unable to escape the legacy of central economic planning.

In particular, China remains the only reforming socialist (or formerly socialist) economy to become a more significant participant in the world economy. None of the countries of Eastern Europe, much less the Soviet Union, has any prospect for following soon the path China has blazed. Moreover, increasing China's involvment in the world economy continues to be on of the most significant stimuli of long-term change in China's political system as well.

The United States should therefore lift its remaining economic sanctions against China. This would have several benefits. First, at teh margin it would further China's integration into the world economy. Eliminating the remaining restrictions on World Bank and Asian Development Bank loans to China, for example, would have positive effects on both the availability and the terms of commercial credit for Beijing. It would also obviate China's perceived need to run a large current account surplus. Resuming serious negotiations on China's accession to the GATT would provide opportunities for discussions leading to further liberalization of China's international trade and payments regimes. Easing constraints on the commercial sale of high-technology products to China would further stimulate domestic growth in China and tend to reduce the U.S. trade deficit with China.

Second, eliminating the remaining U.S. sanctions would enhance the prospects for long-term political change in China. The continuation of sanctions only plays into the hands of conservative forces in China that seek to limit the extent and nature of China's participation in the world economy largely because they fear its long-term political consequences.

Third, lifting sanctions would diminish the exaggerated sense of political isolation felt by China's leaders over the past year of so. The Chinese leadership is increasingly uncertain about China's role in the emergin post-Cold War international system. Continuing sanctions only heightens this sense of uncertainty and isolation. Removing sanctions and acknoledging China's continued economic reforms would reduce the sense in Beijing that the United States is seeking to diminish China's role in the international system.

Finally, ending sanctions would reduce potential friction between the United States and other governments, all of which ended their sanctions against China, some beginning as early as 1989.