Franklin L Lavin. Foreign Affairs. Volume 73, Issue 4, July/August 1994.
America’s 1993 trade deficit with China—$23 billion—was its 2nd largest, right after its deficit with Japan. It is hard to avoid the impression that the Chinese market remains essentially closed to the US while the American market is essentially open to China. A careful review of prior trade negotiations with the Chinese should help explain not only the persistence of the trade imbalance and China’s barriers to US businesses, but also the broader difficulty of dealing with a political culture that often works from an entirely different set of assumptions. China views trade from a starkly different perspective than does the US, regarding it from an essentially neomercantilist point of view. Trade negotiations are perceived as a zero-sum game: any benefit to the US can only come at China’s expense. By contrast, the US has a neo-classical perspective, which regards trade liberalization as essentially beneficial to any country. In negotiations with the Chinese, even the best of strategies is likely to produce progress only at the margins, and even that after much unhappiness on both sides.
If international trade is such an undisputed good, why are there so many disputes in international trade? Nowhere is this paradox more acute than with China. Every encounter between U.S. and Chinese negotiators has been characterized by unpleasantness and friction. A few years of negotiations between the United States and Mexico resolved a gamut of trade issues and led to a free-trade accord. During the same period, the Chinese agreed to only modest liberalizing steps, and only after the United States raised the specter of massive trade retaliation.
The United States and China have had substantial trade relations only for about a decade. But already a sharp pattern has emerged. America’s 1993 trade deficit with China—$23 billion—was its second largest, right after its deficit with Japan. China’s $32 billion worth of exports to the United States constitutes more than one-fourth of China’s total trade. U.S. exports to China, however, totaled only $9 billion and made up less than two percent of all U.S. exports. A bilateral deficit may be the result of many factors, but even so, the U.S. import-export ratio with China is the worst of all its major trading partners. It is thus hard to avoid the impression that the Chinese market remains essentially closed to the United States while the American market is essentially open to China.
This wave of Chinese imports has emboldened affected American industries, such as textile and apparel. American labor unions and other groups have issued protectionist calls to stem the tide. Alongside China’s reduced appeal as a strategic asset with the end of the Cold War and its elevated profile as a target for human rights criticism after the Tiananmen Square massacre, the general trade imbalance also incites annual congressional demands to eliminate China’s most-favored-nation trade status and even to impose sanctions on Beijing.
In such a laden atmosphere, the hurdles to doing business with China loom all the larger. Washington policy-makers and American businesses have much to learn in negotiating trade and other issues with the Chinese. Especially in dealing with China, political cultures and political systems matter. They shape expectations, the interests of negotiators and the desirability of outcomes. A careful review of prior trade negotiations with the Chinese should help explain not only the persistence of the trade imbalance and China’s barriers to U.S. businesses, but also the broader difficulty of dealing with a political culture that often works from an entirely different set of assumptions.
Through the Looking Glass
In negotiations, participants are expected to rationally pursue their interests. But interests can be bureaucratic or personal as well as national. In China’s closed political system, no official depends on popular reelection as the reward for pursuing sound policies, so little incentive exists to risk even prudent policy changes. An overwhelming institutional bias exists in favor of the status quo.
China views trade from a starkly different perspective than does the United States, regarding it from an essentially neomercantilist point of view. Trade negotiations are perceived as a zero-sum game: any benefit to the United States can only come at China’s expense. By contrast, the United States has a neoclassical perspective, which regards trade liberalization as essentially beneficial to any country. Free trade is seen as a way of helping China advance its overall economic interests at the expense of parochial concerns. U.S. negotiators approach trade talks much like union-management bargaining: all parties will come out ahead if they are not too greedy. They evaluate Chinese positions against international norms, the goal being to move China toward a rational, codified system of behavior. A Chinese negotiator, however, comes from a completely different perspective. He will evaluate U.S. suggestions from a more practical and personal point of view: How does this idea affect me and my ministry?
For example, in one morning session of the 1991 market access talks, the U.S. delegation heard four Chinese ministries give four completely contradictory arguments as to why they could not liberalize. The agricultural sector could not be opened because it employed too many people; the computer industry because it employed too few. Consumer appliances could not be opened because they were low-tech; electronics because they were high-tech. The Chinese were surprisingly unabashed about employing economic sophistry. But that tendency reflected bureaucratic self-interest more than economic ignorance. All four of these industries are run by central government ministries in Beijing. Opening markets to foreign steel, say, could throw hundreds of thousands of Chinese out of work. While an American business executive might receive a bonus for making his or her work force more efficient, a Chinese minister could be sacked.
From the start of the negotiations profoundly divergent interests exist, or at least the perception of divergent interests. The U.S. side thinks it is acting in support of Chinas long-term economic interests. But to the Chinese, requests for market openings sound more like, “We would like to flood your markets with cheaper or higher-quality imports, drive millions of people out of work, close down entire cities and force several ministers and members of the central committee to resign.” Obviously, this is not an appealing proposition. Thus, in addition to negotiations being fraught with political implications for the Chinese, American proposals may often sound strikingly and inherently unattractive.
The idea of any foreign country making demands on China to reform its trading system is unappealing. In the market access talks, American negotiators tried to emphasize that because U.S. trade policies were not necessarily reciprocated, solutions to fixing trade problems should not necessarily be reciprocal—an idea the Chinese found difficult to accept. If they “gave up” something, they expected the United States to give up something in return. The United States, however, insisted that it had opened its markets substantially over the preceding years and was now simply seeking equal access.
Another peculiarity of the Chinese approach is the largely political way of dealing with complaints. Any complaint the United States made against China was subsequently made against the United States. Given the volume and complexity of international trade, some sort of problem always existed for the Chinese to point to. But they made no attempt to assess the merits of individual complaints and simply resorted to a robust eye-for-an-eye approach that often operated independently of the facts.
The Chinese ultimately approach trade talks as if they were a political rather than an intellectual debate, the aim being to win the audience, not the argument. Thus the U.S. negotiating team was composed of trade experts, lawyers and economists, while the Chinese side was made up of politicians and historians. The Americans were there to solve problems; the Chinese to state at every turn that their point of view was correct and justified because of China’s historical circumstances or current conditions. And because China is drenched in history, at least one historical point could be found to bolster any argument.
In the end, the Chinese goal was to blur the political and philosophical distinctions between the U.S. trading system, which is largely open with some flaws, and the Chinese system, which is essentially a collection of flaws with one or two openings.(3) Talks sometimes took on the air of theater in which the Chinese lines were all scripted. The Chinese were not actually negotiating anything, at least not as Americans understand the term.
Knowledge is Not Power
In negotiations with the Chinese, even the best of strategies is likely to produce progress only at the margins, and even that after much unhappiness on both sides. Given the depth of Chinese sensitivities and institutional prejudices, in the 1991 market access negotiations, American trade officials crafted a two-pronged approach that offered a package of reforms that could be regarded as good for both sides and also threatened credible trade sanctions if the Chinese were not forthcoming.
The U.S. team tried to shape a convergence of interests by explaining the benefits China would receive from a more open trading system. It attempted to minimize the dislocation of Chinese workers by offering phased-in reforms for specific sectors. It also made symbolic concessions to provide the illusion of reciprocity, so that the Chinese negotiators could sell the agreement within their government.
The American delegation was well-versed in all the facts of U.S. trade policy, international regulations and the history of U.S.-China commercial relations. It patiently and politely attempted to disabuse the Chinese of any mischaracterizations in order to set the record straight, in the belief that an allegation not rebutted is an allegation that sticks. For example, when the Chinese tried to defend a particularly high tariff by finding the three countries whose tariffs on that item were even higher, the U.S. team would then compare it to the tariffs in all major trading countries to show that China’s tariff was not the best of four, but in fact the fourth worst in the world.
None of the U.S. arguments ever “worked.” The Chinese never conceded one point in the debate. No U.S. statistic, no citation of international law, no familiarity with international trade or commercial practice mattered in the end. Knowledge was not power. Even if U.S. arguments worked as exercises of logic, they could not work as exercises of negotiation. Even if the entire Chinese delegation agreed, it would not have affected the outcome. n the Chinese system, no official can go to his superior and argue that China should adopt the American view because China was “wrong” and the United States was “right.”
The Chinese strategy was to dispute everything and wait until the last minute to make even the smallest concessions. Along the way, the Chinese negotiators offered a series of empty concessions. For example, they offered to drastically reduce import barriers to black and white television sets. The significance of the concession fades, however, once one realizes that there are no longer any U.S. manufacturers of black-and-white television sets. While it tests the patience of American negotiators and often appears hostile or self-defeating, this kind of probing to the Chinese was the rational pursuit of their interests. It was intended to find the absolute minimum that the United States would accept.
The Chinese negotiator’s job was not to evaluate the merits of a particular position and work out solutions. His job was to say no for as long as possible. Negotiations to the Chinese are a calculation of interest and power, and they can only progress once your partner moves beyond mere talk In the end, what mattered far more than logic, facts or force of argument was that, as the negotiations had begun, the U.S. delegation placed the “loaded gun” of trade retaliation on the table and pointed to it occasionally.
The Virtues of Artillery
Trade retaliation was employed in both the intellectual property rights and market access negotiations. U.S. law allowed Washington to investigate areas of purported unfair trade, attempt to resolve the unfairness and, failing to do so, impose punitive tariffs on goods from the country in question.
The Chinese were apoplectic with the prospect, and the stridency of their response—”You cannot threaten us. This will hurt you more than it will hurt us. We have lived without trade with the United States for five thousand years, and we will do so for five thousand more, etc.”—demonstrated that the U.S. delegation had chosen the right weapon. Clearly, the Chinese were unhappy. But the prospect of sanctions worked, and the Chinese response—that they would not give in to bullying—was, of course, most strenuously voiced just before they gave in.
The American threat worked for a number of reasons. First, the U.S. sanctions were as focused as possible, and the punishment was of the same magnitude as the crime. American businesses were being deprived of sales on the order of several billions of dollars, so the proposed sanctions were designed to diminish Chinese exports by the same amount. The punishment was equal to the crime: trade sanctions for trade problems. The U.S. approach was as nonintrusive as possible and designed merely to deal with the matter at hand. Importantly, because the Bush administration was viewed as relatively friendly, the Chinese did not interpret the sanctions as a judgment on China’s policies writ large, an attempt to interfere in its internal politics or a broadly hostile act designed to injure China’s national interests.
On the Chinese side, economic, political and bureaucratic considerations gave the prospect of sanctions a solid impact as well. Economically, the retaliation would certainly have cost the Chinese a portion of their exports. It also would have signaled the international business community that a Sino-American trade war was looming and to steer foreign business clear of China. Politically, China’s rapidly emerging merchant class might have perceived Beijing’s leaders as incapable of looking after its interests if they chose to prolong some silly quarrel with the Americans rather than allow everyone to get on with the business of making money. Bureaucratically, the threats allowed the Chinese negotiators to go to their superiors and say, in effect, that although the Americans were being as irresponsible as ever, we would be better off working something out with them. Thus the prospect of sanctions shifted the debate from the question of who was right, to which the Chinese would never accede, to the question of which course would best serve their interests, national and personal.
A Different Kind of Carrot
In the future, the United States—indeed, any negotiator—should avoid putting the Chinese in an impossible position. Negotiations are best structured as a win-win activity. In trade negotiations, such a structure is usually not difficult to achieve, since in any normal trade opening both parties usually do win. Since the Chinese do not necessarily share that perception, however, greater creativity is required to avoid the impression that the United States is trying to “do something” to them.
Besides facilitating negotiations, a more creative approach might also help alleviate the problems of compliance. The real negotiations with China often begin once the agreement is signed. For one thing, it is unclear to what extent. China honestly desires to abide by its trade agreements. Beijing often considers itself to have entered into them under duress. After an agreement is reached, the Chinese attitude is never, “Thankfully that issue is resolved, and now we can both expand trade,” as it might be in other countries. Instead, the response is more, “The Americans have given us an impossible mess in this silly agreement, but at least they have left the country.”
Beyond the lack of central government enthusiasm for compliance, there is also the issue of central government control. Despite nominally reporting to government ministries, many industries and provinces in China exercise a fair amount of autonomy. Few plant managers will simply shut down a production line because somebody in Beijing tells them to do so, and few customs officials will readily allow more imports and thereby lose opportunities for graft and kick-backs.
For example, mammoth state-owned Chinese factories make millions of dishwashers, washing machines and dryers. But because these products are designed to meet production quotas rather than the needs of Chinese consumers, hundreds of thousands of them must be stored. Nobody will buy them. Rather than simply demand that the Chinese import household appliances, which would only exacerbate the problem, a more constructive U.S. proposal would attempt to rationalize the industry by asking different kinds of questions: What percentage of production could American companies locate in China? What Chinese factories could be phased out because they are located in regions with rapid economic growth and expanding labor needs? Which communities depend on the factories for their survival? Which American manufacturers would be willing to purchase and operate Chinese firms? What type of investment would make the Chinese firms operate competitively?
Such an approach would naturally require a far higher degree of coordination between Washington and the American business community. But if trade talks were part of a broader discussion of how to modernize Chinese manufacturing, it would ameliorate much of the dislocation that would be caused by the Chinese simply opening their markets. Only by addressing the domestic political and economic impacts of its proposals can America really negotiate freer trade with China. And by putting a different kind of carrot on the table along with the “loaded gun,” the United States will substantially enhance its prospects for a successful agreement. Now that would be a negotiation.
(1) While at the Commerce Department, I participated in three sets of negotiations with the Chinese. Intellectual property rights talks were prompted in 1991 by China’s failure to protect products such as trademarks, sound recordings and computer software. Market access talks in 1991 dealt with structural trade barriers, the overlapping system of tariffs, quotas and licensing requirements that made the Chinese market almost impenetrable. The Joint Commission on Commerce and Trade was a bilateral consultative mechanism that attempted to review business disputes and improve the business environment in China.
(2) The overall dichotomy of approaches to negotiations frequently surfaces in routine business discussions with Chinese officials. American businesses typically approach a project from the criteria of acceptability: Does it conform to China’s legal system, tax provisions and labor regulations? The Chinese, on the other hand, typically approach a project from the criteria of desirability: What benefits does it bring us in terms of increased investment, foreign exchange, employment or technology transfer?
(3) Some U.S. negotiators saw parallels with the Soviet Union’s approach to human rights. The Soviets would routinely find some transgression in the West, particularly in the United States, and advance the moral equivalency argument that all countries have human rights problems. Finally, the Soviets would turn on their previous statement and deny that they had any problem at all.