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Policy: Alan P. Larson Assistant Secretary of State for Economic and Business Affairs Remarks before U.S.-China Business Council Washington, D.C. June 5, 1997

Good afternoon. Thank you for that kind introduction. It is a great pleasure to be here today. I would like to thank the U.S.-China Business Council for hosting today's program, and for providing this opportunity to talk about why MFN renewal is in the United States' national interest, and to discuss the state of play regarding Chinese entry into the World Trade Organization.

The Clinton Administration's approach to China has been guided by three tenets: first, that China's development as a secure, prosperous and open nation is very much in the United States' national interest; second, that we support China's full integration into, and active participation in, the international community; and third, that we regard dialogue and engagement as the best way to manage our differences, but we will not hesitate to take the necessary action to protect our interest in those instances where our interests diverge.

I recognize that I'm preaching to the choir here, but it is my firm belief that engagement represents the best course for managing our relations with China at this important juncture in U.S.-China relations. And contrary to what its critics assert, our engagement with China has resulted in some significant successes. The reforms that China has undertaken since 1979 have slowly produced tangible benefits for the Chinese people and created the potential for further openness to reform down the road. This progress, while limited and insufficient, would not have been undertaken at all by an isolated China. Similarly, it is our belief that as China becomes more fully integrated into international institutions, it increasingly will have important incentives to abide by the rules of the road and assume commensurate obligations. One area in which we have already seen the benefits of China's participation in international regimes is in non-proliferation. Although we continue to have significant disagreements with the Chinese on this front, China has begun to work with us significantly including in helping to secure unconditional extension of the Nuclear Non-Proliferation Treaty, to complete the Comprehensive Test Ban Treaty, and to achieve the shutdown of North Korea's nuclear weapons program.

Of course, engagement has not resolved all of our differences with China and China's integration into the world economy is far from complete. For engagement to work, we must be willing to take action to protect our interests -- and we have. Our willingness to enforce U.S. laws was critical to reaching our understanding with China last year on China's assistance to unsafeguarded nuclear facilities. Similarly, the threat of sanctions prompted China to agree last year to implement the accord on intellectual property. We will continue to voice our disagreements with China clearly and loudly on market access as well as on human rights and religious freedom, where gross violations sadly still occur.

It is against this backdrop that the debate in Congress over MFN renewal and scrutiny of China's efforts to accede to the WTO are taking place. Indeed, some view the MFN debate as a referendum on our policy of engagement. Some have even attempted to cast it as a referendum on China's current policies. This year, the issue is further complicated by the reversion of Hong Kong to Chinese rule on July 1 and allegations of Chinese involvement in campaign financing. For all of these reasons, as Secretary Rubin said earlier, our task is especially difficult this year.

The real question, of course, is whether renewing MFN is in the United States' national interest. Are we more likely to achieve our goals by renewing MFN or by revoking it? Renewing MFN is clearly in the United States' national interest and it is more likely than not to further our goals vis-?vis China and Hong Kong. Revoking MFN would be both ineffective and counter-productive. It would undermine Hong Kong's economy and autonomy. It would impose substantial economic costs on the United States. It would set back, if not derail, China's accession to the WTO. It would strengthen the hand of those within the Chinese leadership who oppose reform, thereby worsening the prospects for improved Chinese behavior in the areas of greatest concern to us. And it would hinder China's evolution into a more market-oriented, law-abiding and, it is hoped, more open society.

As this group knows, the term MFN is really a misnomer. Despite its name, Most Favored Nation status is not a privileged status accorded only to close friends. It is normal trade relations -- the ordinary tariff treatment we accord to almost all countries in the world. The United States offers MFN, or ordinary tariff treatment, on a near-universal basis because we fundamentally believe that free and fair trade is the foundation for peace and prosperity -- and frequently for democracy as well. That belief has informed the decision of every U.S. president since 1980, Democrat and Republican alike, to extend MFN status to China.

If Congress were to take the contrary course this year and vote to revoke MFN with China, it would effectively hurl a wrecking ball into the U.S.-China relationship. As Sandy Berger put it when the president's decision to renew was announced, ending MFN means essentially severing our economic relationship with China. And ending our commercial relationship would deal a severe blow to our political relationship with the world's largest nation -- and a nation that is of critical importance to the peace and stability of Asia and the world. We cannot dictate China's behavior or direction but we can seek to influence it if we remain engaged with China. We will have almost no prospect of influencing China's course if we sever our economic relationship with China by revoking MFN.

As you know, this year concerns about the upcoming reversion of Hong Kong have prompted some in Congress to advocate using MFN as leverage to protect Hong Kong's current autonomy and freedoms after July 1. We in the Administration share those concerns but are convinced that renewing MFN provides the best hope for achieving those goals. And Hong Kong's leaders agree and have stated publicly that revoking MFN -- or approving MFN for a shorter term than one year -- would damage Hong Kong's free market economy and its political autonomy. Since more than 50 percent of U.S.-China trade flows through Hong Kong, its viability and autonomy are dependent on continued normal trade relations between the U.S. and China. MFN revocation would slash Hong Kong's trade with the U.S. by $20-30 billion, with a resulting loss of between 60,000 and 85,000 jobs, thereby undermining Hong Kong's viability and autonomy.

Revoking MFN would also damage Taiwan's economy, which has $20-30 billion invested in mainland China. In addition, the chill in U.S.-China relations that would result from revoking MFN would not create an environment conducive to a peaceful resolution of the Taiwan issue.

Moreover, revoking MFN would severely damage U.S. interests across the board. First, it would have serious adverse effects on the U.S. economy. As this group knows, withholding MFN status would substantially raise U.S. tariffs on Chinese imports, increasing the average from 6% to 44%. This would significantly increase the cost to consumers of basic goods imported from China, costing U.S. consumers upwards of half a billion dollars more each year for such goods as shoes and small appliances. Low and middle-income Americans purchase many of these goods.

The second obvious consequence is that China's sales in the U.S. would drop dramatically, which would provoke Chinese retaliation against U.S. exports. This would jeopardize the approximately 170,000 American jobs that are dependent on these exports. It would also leave the door to the China market wide open to our foreign competitors like Japan and the European Union, who would gain at our expense.

Second, revoking MFN would undermine our efforts to open China's market and increase our exports. It would deprive China of incentives to observe international trade rules and existing trade agreements, and it would derail the multilateral and bilateral trade negotiations to increase our access to China's market. U.S. exports to China have more than tripled in the past decade, an overall rate of growth that is greater than increases in exports to other parts of the world. Revoking MFN is certain to draw Chinese retaliation, putting our current exports and their potential future growth at risk.

Third, revoking MFN would undermine, not advance, the cause of human rights and religious freedom. Revocation would curtail contact with the West and strengthen the hard-liners within the Chinese leadership who favor less openness. Today, Chinese employees of U.S. firms in China have direct e-mail access with their colleagues in the U.S. and thousands visit this country each year, gaining exposure to our economy and personal freedoms. This would probably all end if MFN is revoked. It is also the view of the China Services Coordinating Committee, which serves over 100 Christian organizations in China today, that revocation would set back the cause of religious freedom.

But let me be frank: commercial activity is not a substitute for an acceptable human rights policy or religious freedom. That's why the United States speaks out forcefully about Chinese abuses in these areas, jointly with our allies when possible, and alone if necessary. America has repeatedly stood up and made it very clear -- recently in Geneva and elsewhere -- that we are not satisfied with China's human rights practices.

Furthermore, as Secretary Albright recently stated, religious freedom is a priority human rights concern of the United States -- a principle we are committed to defend in China and elsewhere. In this regard, we have strengthened efforts to keep the public spotlight on China's practices, including the first reference by any U.S. administration to China's restriction of religious freedom in our annual statement on religious tolerance at the UN Human Rights Commission. And we will continue to keep the pressure on China to improve its record in these areas.

Fourth, revocation would set back other U.S. interests as well. It would weaken our efforts to bring China into non-proliferation regimes. Chinese cooperation on a range of issues, from peacekeeping to drug interdiction to the Korean peninsula would be injured. All of these are areas where our engagement with China has produced concrete results. That is why renewal of MFN is widely supported throughout Asia, including by Japan, Korea and the ASEAN countries. They know better than anyone that revocation would be a serious blow to Asian security and stability.

Fifth, MFN revocation would likely freeze the progress in China's accession negotiations with the WTO. The United States supports China's accession to the WTO and its integration into the rules-based world trading system, but insists that China's WTO accession be on commercial terms. WTO accession will mean greater access for a wide range of us goods and services into one of the world's fastest growing economies. It also means bringing China into the rules-based trading system. To meet WTO requirements, China must make laws public, require judicial review of all trade activities, apply trade laws uniformly, and submit to WTO dispute settlement to ensure compliance with WTO rules. China must agree bilaterally with WTO members on increased market access for goods, agricultural products and services. It must also multilaterally negotiate a protocol of accession which will spell out the specific obligations it will assume.

We have led the world in demanding that China significantly reduce its trade barriers and in seeing to it that any viable accession package would require China to cut tariffs, provide market access to U.S. service companies, and remove quotas and unfair licensing requirements. Our firm position with China has begun to pay off and China has recently shown new seriousness in putting forth more meaningful proposals. Over the past nine months, the U.S., China and other members of China's WTO working party have intensified negotiations. Last October, the Chinese announced the implementation of a "standstill" agreement, whereby China will issue no WTO-inconsistent policies during the course of the accession talks. In early March, China took the fundamental step of agreeing to phase in trading rights for foreign materials and firms. It has also agreed to implement the TRIPS agreement on accession and not to discriminate against imported products. These are clear indications that serious negotiations have begun, but there nonetheless are several key issues that remain unresolved.

Specifically, the offers China has put on the table on market access for goods, agricultural products and services are inadequate. Meaningful market access in China will require substantial reforms to address subsidies for China's state-owned enterprises, which still employ two-thirds of China's work force. Moreover, details on implementation of the commitments China has already made remain to be negotiated. But there are signs that China may be willing to move in these directions. At this important juncture, we should encourage China to redouble its efforts to obtain WTO membership. The last thing we should be doing is threatening to revoke MFN.

Whether we like it or not, China is on the verge of becoming a great economic and political power. It is simply not within our capacity to dictate China's conduct or direction. But through engagement we can seek to use all the means at our disposal to constructively impact China's future path. We will surely continue to have disagreements with China, as we have in the past, but we are best served by dealing with those issues directly rather than in a way that would isolate us from China.

Although we continue to believe that our goals are ultimately best served through engagement, it is nonetheless incumbent upon us to ensure that we do not allow engagement to turn into complacency or to be construed as acquiescence in all of China's policies. And here both government and business can play important roles. The Administration should and will continue to be a voice for human rights and religious freedom in China, for these are bedrock principles. America's sustained efforts, including our co-sponsorship of a UN Human Rights Committee resolution critical of China's human rights practices, helped persuade China to sign the International Covenant on Economic, Social and Cultural Rights. That covenant codifies China's commitments in such areas as the right to education, fair wages, and safe working conditions. We will continue to press China in these areas, and will use our voice and vote in multilateral institutions, including the multilateral development banks, toward these ends. We will also use the leverage at our disposal -- be it our trade laws or the threat of sanctions -- to press China in such areas as market access and non-proliferation, where we have had some success in the past.

And what can business do? Business can help bring about the kind of change we would all like to see in China by remaining true to American principles and values, particularly in such areas as worker rights and prison labor. In this regard, I would urge broader adherence to the Model Business principles promulgated by this Administration. I commend those who do not accept materials made by prison labor and those of you who have demonstrated through your business practices a commitment to fair treatment of workers in China and elsewhere.

In conclusion, I would reiterate that engagement is not an end in itself but a vehicle for expanding our cooperation with China -- and for addressing our differences. We continue to believe that commerce with China is a necessary, if insufficient, condition for furthering openness and reform, in commerce and in all other areas of concern to us. As you all know, our ability to engage China depends heavily on our strong commercial links to China -- links which MFN has fostered and anchored since 1979. I don't have to tell this group that renewal of China's MFN status is absolutely essential to maintaining the constructive dialogue with China on which so much depends.

Thank you.