From Kosovo to Beijing:
Nasty Exchanges Between the U.S. and China
Summary
The U.S. allowed the deadline with Serbia to pass without a
settlement. Among the most important reasons was that the U.S.
could not afford a major confrontation with Russia. Having
avoided a Russian confrontation, the U.S. fell into one with
China. The U.S. attacked China's human rights record while China
condemned U.S. interference in China's internal affairs. Hong
Kong's top court acknowledged that its decisions can be reviewed
by the Chinese parliament, while the crackdown on dissidents
continued. News leaked that China has 100 nuclear missiles
pointed at Taiwan while Taiwan discussed the possibility of
purchasing anti-missile defenses from the United States.
Madeleine Albright arrived in China on Sunday, to begin talks.
The reality is that with U.S. investment drying up, Albright has
very little to offer. In fact, with billions of dollars of
investment already in China, the unspoken fact is that pressing
the Chinese too hard on anything can place these investments at
risk. Where human rights are not respected, what makes anyone
think that property rights will be sacrosanct? When the United
States was making investments in China, it called the shots.
With the investments already in place and a severe drop in
investments occurring, the Chinese have the upper hand. We
expect Secretary Albright to find a way to accommodate the
Chinese just as she accommodated the Russians over Kosovo. She
certainly doesn't have many levers to use on the Chinese or the
Russians these days.
Analysis
The Tuesday deadline for an agreement over Kosovo came and went
as had the prior Saturday deadline. Serbia wasn't bombed and the
Serbs didn't agree to let NATO peacekeepers into Kosovo. Indeed,
by the weekend, Serb forces were digging in along Kosovo's
borders with Macedonia (where peacekeepers would have been coming
from), planting minefields, and surrounding predominantly
Albanian towns. The March 15th date for a resumption of talks
is, of course, a mere fig leaf. U.S. aircraft were already being
rotated back to the United States. There were a host of reasons
for the stand down. Negotiators couldn't get the Albanians on
the same page. It became clear that the Serbs were genuinely not
going to back down and weren't all that terrified of air strikes.
The air campaign in Iraq was moving forward and Washington did
not have an appetite for two wars at the same time. And of
course, it was increasingly clear that attacking Serbia would
have meant a serious and possibly irreparable breach with the
Russians.
The latter was the most important reason for declaring victory
and going home. The most important event in the world this week
was not the fact that the U.S. threw in the towel on Kosovo, but
the extraordinary explosion that took place between the United
States and China. We have been chronicling deteriorating U.S.-
China relations for quite a while now, but this week's explosion
between the two countries on the eve of a visit to China by
Madeleine Albright was startling in its intensity. Triggered by
the release of a State Department report criticizing China's
human rights record, it was clear that U.S. policy makers knew
the explosion was coming. Given that they knew that a breach in
U.S.-China relations was in the works, they also clearly
understood that a simultaneous breach with Russia was
strategically unthinkable. This was one of the reasons they
backed off on Kosovo. China and Russia are close enough to each
other now without the U.S. deliberately driving them into each
other's arms.
Kosovo is trivial from the U.S. strategic standpoint. The U.S.-
Chinese-Russian triangle is not. Thus, in a way, U.S. foreign
policy shifted from a luxury, the fate of Albanians in Serbia, to
an essential issue, the relationship between the United States
and China. This week the United States decided to drive a wedge
between itself and China. It is important to understand why that
wedge was driven and how it was driven.
The immediate trigger was a report issued by the United States
State Department that charged China was committing ''widespread
and well-documented human rights abuses." On Friday President
Clinton added to the fire by saying "I believe sooner or later,
China will have to come to understand that it simply cannot
purchase stability at the expense of freedom." China went
ballistic, expressing its "indignation" at the U.S. criticism and
interference in China's internal affairs. The Chinese went on to
say that, "Instead of preoccupying itself with violations of
human rights committed in the United States, the American
government deliberately distorts the situation on human rights in
other countries." The Chinese went beyond statements, ordering a
crackdown on dissidents over the weekend. One dissident was
ostentatiously sentenced to 18 months in prison on Saturday. In
addition, Wu Yilong, a leader of the Democratic movement, was
arrested on Friday.
Perhaps more significant, Hong Kong's Court of Final Appeals, its
highest judicial body, conceded on Friday that it is legally
bound to "clarify" its rulings to China's National People's
Congress. A few weeks ago the Court had ruled that anyone whose
parent was resident in Hong Kong had a right to immigrate there.
For various reasons, Beijing objected to the ruling. More
important, it claimed that Hong Kong's Court of Final Appeals had
to submit that ruling to the National People's Congress for final
review. In other words, it asserted that Hong Kong's judiciary
was not the final legal authority in Hong Kong, but that China's
parliament and, by extension, China's Communist Party, was. On
Friday, the five member Hong Kong Court acknowledged that they
were obligated to clarify their views to Beijing, in effect
putting to rest expectations that the Court was the self-
sufficient guarantor of the law in Hong Kong. That meant that
everything from property rights to civil liberties was under the
control of Beijing.
Now, with Madeleine Albright arriving on Sunday, it is clear that
both the United States and China wanted these talks to take place
in the worst possible atmosphere. Each side did whatever it
could to upset the other. For all its pious sentiments, the
United States has never been particularly committed to human
rights violations in China in the past. Even in the best of
times, China has been repressive. There was no need to publish
this report just as the Secretary of State was getting on the
plane. On the other side, there is no one who seriously doubted
who really controlled Hong Kong. Why force the Hong Kong judges
to bend their knees publicly to Beijing just before Albright's
arrival? What are the real reasons driving the U.S. and China
apart? It seems to us that there are two issues and a
fundamental strategic reality. The two issues are economic and
military. The strategic reality is that China is redefining its
relationship with the outside world amidst very new economic and
military realities. Indeed, in a certain sense, what is driving
China away from the U.S. is precisely what is driving Russia
away.
Economically, China has managed to remain overtly healthy. Apart
from the published statistics, however, it suffers many of the
same problems as the rest of Asia and particularly Japan. Its
banking system is in a shambles, having loaned money on political
and personal bases rather than economic ones. Its economy grows
quickly, but not profitably. The rate of return on capital is
insufficient to recapitalize its own economy. Industry is
bloated with excess workers and is highly inefficient.
Maintaining these industries soaks up available capital. The
Chinese have taken steps to rectify the situation, closing
government enterprises, allowing businesses to go bankrupt, and
increasing domestic infrastructure projects. The net result has
been massive unemployment and social unrest without a substantial
turnaround. Whatever the official statistics say, China is in
deep economic trouble.
One solution that China has is the export card. By cutting
prices to the bone and sometimes lower than cost, China can
maintain industrial growth rates and keep people working while
losing money. This is, at best, a short-term solution. However,
it is a solution that infuriates Washington. China has a massive
trade deficit with the United States. But more important than
the trade issue is the complex and explosive issue of investment.
Until the Asia economic crisis hit with full force in 1997,
American companies were making massive investments in China. A
potential investor has a great deal of power over the recipient
of investment. Once the investment is made, the relationship
shifts, and the recipient has power over the investor. This is
particularly true when there is no further investment coming.
U.S. investment in China has declined dramatically, given China's
problems and the problems in the rest of Asia. This means that
China no longer has to please potential investors. It no longer
has to present China in a way that will make investors want to
invest, since they aren't going to invest anyway. So, China no
longer has to craft an image of a country that is highly
sensitive to Western concerns about human rights.
Indifference to human rights makes Western businessmen very
nervous. This is not because they are particularly concerned
about freedom of expression or religion. But they are concerned
about the rule of law. To be precise, a corporation that has
invested $50 million building a factory in China wants to know
that it will be able to use that factory, that it will be able to
repatriate money made from that factory and, most of all, that
the factory won't be taken away. When we remember that China is,
after all, a communist country, which has in the past
nationalized private property, businessmen are very, very
committed to the idea of China obeying the law. When China
starts to show signs of not obeying international agreements (as
in the Hong Kong case) or disregarding basic human rights, they
start to worry about the security of their own investments.
Up until recently, the Chinese would have done anything necessary
to allay these fears. But China has other problems today.
Massive unemployment has led to serious social unrest. There has
been ethnic violence involving Moslem separatists in Xinjiang
province. A wave of bombings has taken place in China, with the
perpetrator uncertain. Beijing is seriously concerned about its
internal stability. Since few Western businessmen are going to
invest in China anyway, the Chinese feel that they can turn their
attention to the immediate problem of maintaining political
stability and the power of the Communist party. If this means
arresting dissidents, clamping down on Hong Kong's legal system,
suppressing strikers, then that is precisely what China is going
to do.
China is making it very clear to the United States that it is
primarily concerned with maintaining social stability in an era
in which Western investment is drying up. Madeleine Albright is
not carrying Western investment in her pocketbook. The days of
U.S. cabinet members arriving with hordes of corporate investors
on the plane are over. Since she is not carrying investors, she
is in no position to demand that China put on its investor's
face. China is letting Albright know that the end of Western
investment means the end of liberalization in China. Indeed, it
means the end of China caring what the United States thinks about
China's behavior.
The absolutely unstated menace is that of nationalization. There
may not be much investment coming in, but there are huge amounts
of investment already made. China is permitting Western
companies to exploit those investments without hindrance, to this
point. But the presence of this investment in China represents
as huge vulnerability. How hard can the United States press
China on matters that appear to be of fundamental interest and
importance to the Chinese government, before China places these
investments on the table as a bargaining chip?
There is an important military dimension here as well. China has
enjoyed major technology transfers from the United States that
has helped it modernize its military. A recent decision by the
Clinton Administration barred Hughes from selling any more
satellite technology to China. On the other side of the ledger,
there are serious discussions underway between Taiwan and the
United States for the sale of anti-missile technology to Taiwan.
Since China regards Taiwan as part of China, and since it is
reported to have about 100 nuclear missiles aimed at Taiwan, the
possibility of such a sale is infuriating Beijing.
China has every reason to create a crisis with the United States
right now. The incentives for good relations are gone, the
United States insists on interfering in China's internal affairs,
and the United States has cut off critical military cooperation
with China in favor of potential cooperation with Taiwan. China
is no longer benefitting from its relationship with the United
States. But it does have several cards to play. One is
cooperation with Russia to block the U.S. in places like Kosovo
and Iraq. Another is surging exports into the U.S. and other
markets. The third, the most important but most unmentionable,
is seizing U.S. investments in China.
The United States backed off from Kosovo because it could not
afford to alienate the Russians. Since the U.S. no longer
provides economic benefits to the Russians, the Russians are not
motivated to cooperate with the Americans. This is exactly the
situation in China, with the added element of billions of dollars
of exposed American investments. Having blasted the Chinese on
human rights, Albright has discovered that the Chinese are quite
content to blast back. It is a very different China than the one
Albright lectured in the past. It is a China that is not
expecting Western investment and therefore a China that doesn't
care what Westerners think. Indeed, it is a China that, on
balance, finds that the United States has more exposed pressure
points than the other way around.
In our view, the United States has relatively few means of
pressuring China while China has some major, if only implicit,
pressure points on the United States. Just as Albright had to
climb down from her confrontation with Serbia because of the
Russians, we expect that she will be forced to back down from her
confrontation with the Chinese. The fact is that after the
intemperate investment binge in China, Americans have billions of
dollars of investments to protect in China. Infuriating the
Chinese government is not a very good way to protect them. Those
investments place a basic limit on just how far the U.S. can go
in confronting China on anything.
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