BEIJINGThe storm over the U.S. spy plane is blowing itself out. Extremists on both
sides, assisted by overwrought media coverage, wanted to build the incident into
a major Chinese-U.S. confrontation. But it is now being seen for what it was -
an accident which generated much rhetoric but said little about the U.S.-Chinese
It should be a reminder, however, of the
real issues on which the relationship could founder, the economic and strategic
The strategic issues - arms for Taiwan
and the proposed U.S. missile shield - may appear the more dangerous. They will
continue to generate a barrage of sometimes blood-curdling invective from
Beijing. But that is more the result of China's frustrations at its lack of
leverage than a real threat.
There is little that China can do by way
of forced resolution of the Taiwan issue for at least a decade. Indeed, there is
a reasonable, but not overwhelming, argument that early commitment to supply the
Aegis system and other defensive arms would persuade Beijing to stop dreaming of
reunification in the tangible future and revert to the Mao/Deng doctrine of
leaving the matter to history and to China's manifest destiny.
Economic issues are more immediately
dangerous. They have become the core of the U.S.-$ Chinese relationship and are
a key to China's political evolution during this decade. A breakdown here would
also have huge repercussions for the global trading and financial systems and
thus can be considered a major U.S. security issue.
One the face of things, a breakdown may
seem a remote prospect. China's entry into World Trade Organization is assumed
to be a done deal. As underlined by a recent World Economic Forum meeting here,
U.S. corporations are continuing to invest heavily in China's future, and from
the Chinese side the momentum of reform is being sustained.
China's progress seems to justify those
in the United States who argued that opening the vast U.S. market in the early
stages of China's reform, long before entry into WTO became a possibility, has
paid off. It has been an important lever in China's conversion to a market
system and integration into a U.S.-led global capitalist economy.
However, dangers lie ahead. It is quite
likely that without more commitment now to resolving outstanding WTO entry
issues - the devils in the detail - China will not be a member by November, the
date of the crucial WTO ministerial meeting in Qatar. If so, the chances of
meaningful progress being made at that meeting will be reduced. Indeed it could
become a repeat of the disaster in Seattle.
If the China entry procedure drags on
into 2002 and the U.S. economy is mired in a recession that proves impervious
either to interest rate cuts or tax cuts, China will be exposed. Without the
protection of WTO rules and with a trade imbalance with the United States of
alarming proportions, it will be exceptionally vulnerable to discriminatory
It is now forgotten how much antipathy
there was in the United States to Japan at the height of its trade surplus. Yet
Japan was an important ally and was not accused of human rights and labor
abuses. China is seen more as a rival than a partner and faces the additional
challenge of President George W. Bush giving priority to relations with its
Nor can U.S. business be expected to
continue to press the case for trade with China if exports to China continue to
be weak, profits on investment there remain elusive, profits at home are in free
fall and closer countries such as Mexico offer a more congenial business
The combination of a global slowdown,
financial market volatility, the U.S. trade imbalance and worldwide excess of
manufacturing capacity is worrying for everyone. China is especially vulnerable
to the global upsurge in protectionism that could result from this Perfect Storm
scenario, and in particular to populist and labor sentiment in the United
States, which buys 35 percent of its exports. A severe trade setback for China
would have untold consequences for its domestic reform agenda, and create waves
throughout east Asia and for the global banking system.
This may sound alarmist. It is meant to
be. Management of the U.S.-Chinese economic relationship over the coming two
years will probably be a bigger challenge than the spy plane. We should at least
be aware of the danger and be prepared for damage control. That means moving
quickly on WTO membership for China and being ready to negotiate difficult trade
and currency valuation issues before emotion takes control of the agenda.