JUNE 1997 · VOLUME 18 · NUMBER 6

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T H E    M O N O P O L Y    M A K E R S

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BEIJING -- With Republicans in the U.S. Senate preparing to show how China sought to exercise illegal and improper influence over U.S. politics, the activities of the real -- and far more powerful -- China Lobby have gone unexamined.

Made up of the largest U.S. corporations, the China Lobby is dedicated to unfettered trade with China. It wants to ensure that the U.S. market is open to Chinese imports -- including, most importantly, goods manufactured by the U.S. companies' subsidiaries, contractors or partners in China. And, it is increasingly oriented to ensuring that the Chinese market is open to U.S. investment.

The principal vehicle of the China Lobby is the United States-China Business Council, a grouping of more than 300 firms including Boeing, Philip Morris and AT&T. A host of public relations firms, lobby shops, think tanks and consulting firms -- including the notorious Kissinger Associates of former U.S. Secretary of State Henry Kissinger -- supplement the efforts of the U.S.-China Business Council.

Fresh from another victory on the extension of most-favored-nation (MFN) treatment to China, the China Lobby is now orienting itself to obtain much more sweeping change: it wants to bring China into the World Trade Organization, on terms set by U.S. corporations.

THE MFN FARCE

The primary focus of the China Lobby this decade has been the annual Congressional vote on MFN. Under the Jackson-Vanik amendment, the president must certify that non-market economies permit freedom of emigration before offering them MFN treatment -- meaning application of the lowest U.S. tariff schedule (on average, under 4 percent). The president can waive this requirement after finding that a waiver will promote free emigration. Congress, however, can override a presidential certification of a non-market economy. Bill Clinton campaigned for the presidency criticizing George Bush for extending MFN treatment to China. Upon taking office, however, he promptly flip-flopped, and decided that he too would do the corporate bidding on MFN.

Since Clinton's 1993 reversal on MFN, the annual Congressional vote has been devoid of drama. Human rights advocates urge revocation of MFN, but they are overridden by a Republican-Democrat business-driven consensus.

This year's vote followed the normal script, with a small twist. Religious and other conservative groups stepped up opposition to extending MFN to China, dividing the Republican Party between its social conservative and business wings. The corporate wing of the party proved dominant, however. The focus of debate was the House of Representatives, where the informal coalition between social conservatives, Jesse Helms "anti-communists" and human rights advocates for a time appeared strong enough that the House might ultimately vote to deny MFN to China. In the end, however, the China Lobby proved far too strong for its opponents, and the House voted to reject withdrawal of MFN by a vote of 259 to 173.

The business arguments for extending MFN treatment to China were the familiar ones. A memo from the Business Coalition for U.S.-China Trade, another one of the leading corporate membership lobbies for MFN, runs through the standard claims:

• "Continued expansion of U.S.-China trade is in America's national interest."

• "Economic interaction, and the ensuing interplay of trade, free enterprise, people-to-people contacts, and ideas, can do more to advance freedom and the rule of law than U.S. sanctions, which have only backfired with crippling effects on U.S. policy and credibility."

• "American trade and investment are our best tools for supporting long-term progress on human rights, democracy and the rule of law."

• "American firms play a positive role by providing alternatives to work in state-owned enterprises and introducing American ideas and values."

The members of the U.S.-China Business Council showered money on the major parties and on members of Congress. Sin companies Philip Morris and Seagram's each donated more than $2 million in soft money in the 1996 election cycle; both are looking for a huge boost in sales in China. Aerospace companies Boeing, Lockheed Martin and Northrop Grumman (the latter two now proposing to merge) each donated more than three quarters of a million dollars to the two parties.

The China Lobby PR machine churned out opinion pieces, briefing papers and reports to justify MFN extension.

The corporate lobbying campaign for MFN was highly organized, with leading corporations taking responsibility for delivering different states.

ENTERING THE MIDDLE KINGDOM

The China Lobby's full agenda is much more far-reaching than ensuring renewal of MFN. Paralleling the growing corporate interest in investing and selling in the Chinese market -- rather than just exploiting cheap labor for labor-intensive industries -- U.S. business wants to facilitate a wide range of changes in the Chinese economy to open the market and provide protections for foreign investors. Specific aspirations vary by industry, but the China Lobby hopes to achieve its overriding goals through negotiations over Chinese accession to the World Trade Organization. China would be something of a strange fit with the World Trade Organization (WTO), which consists of market economy members and is oriented to marketizing members' economic and political decisions as much as possible. Because for all its economic reforms China maintains a predominantly state-run economy -- one Shanghai-based Western diplomat estimates the economy is 40 percent market-based -- China will enter the WTO, if it enters at all, on very different terms than other countries.

The first advantage U.S. business would gain from Chinese membership in the WTO is it would "lock in market-oriented reforms," in the words of the Business Coalition for U.S.-China Trade. Chinese membership in the WTO would also require the United States to permanently extend MFN treatment to China, unless it specifically reserved the right to deny MFN.

The potential benefits go far beyond locking in the status quo, however. Exactly what corporations can extract will depend primarily on negotiations between China and the China Lobby's proxy, the Office of the U.S. Trade Representative (USTR). While negotiations have been on-again, off-again, they appear ready to resume on a fast track following the MFN vote. European and Japanese trade negotiators have been much less demanding of China than their U.S. counterparts, although some U.S. diplomats insist the Europeans and Japanese agree with U.S. positions completely but are content to let U.S. negotiators play the "heavy."

High on the list of USTR demands will be a reduction in Chinese tariffs -- which now average approximately 23 percent, about 50 percent higher than most developing countries -- especially in the sectors China hopes to protect behind high tariff walls. These high-tariff areas include autos and auto parts.

But tariffs are only one among many likely demands. Both intentional protections for domestic industry and derivative policies stemming from the state's role in the economy create numerous obstacles for foreign businesses seeking to operate in China.

In a 1996 paper, "China and the WTO: A Reference Guide," the U.S.-China Business Council designates some of the areas where it hopes to see U.S. gains. Among the main issues of concern for the China Lobby:

• The ability of foreign companies to sell directly into the Chinese market ("trading rights"), without going through authorized trading companies and without requirements to invest in China.

• The ability of foreign corporations to establish joint-venture and wholly owned distribution networks, including to sell goods made outside of China.

• Import bans and restrictions maintained in "pillar industries" such as electronics, automotive, machinery and chemicals.

• A series of restrictions placed on foreign investors, including: discriminatory tax, subsidy, resource and credit-allocation provisions; government approval stipulations and limits on the number of joint-venture assembly projects; localization requirements; import restrictions; requirements that foreign enterprises export a percentage of their products; and limits on foreign equity in vehicle projects.

• The strength of penalties for violation of intellectual property protections and access to judicial relief and preliminary injunctions.

From the ground in Beijing, U.S. corporate representatives generally say that they believe Chinese accession to the WTO is very important. But others say they are concerned about the WTO "only in the most macro sense," in the words of one executive. WTO membership will help ensure stability and push the country on the road to liberalization, say those who downplay the importance of WTO membership, but their concerns are more particular than those likely to be addressed in the WTO negotiations. R.A. Deegan, president of the China affiliate of Chevron, which has the largest offshore operations in China, says the foreign oil industry's major concern is obtaining onshore exploration opportunities. Foreign companies are currently limited to offshore exploration, although Exxon China has obtained the first onshore lease. The oil industry is used to working in joint venture arrangements and accepting technology transfer and other obligations, so the rules in China are less atypical for oil companies than for many others.

The auto industry more aggressively favors WTO accession. Representatives in China for both General Motors and Ford place great emphasis on the importance of China joining the global trading organization. Pat Hawkins of General Motors says the company views the joint venture requirements imposed as a result of the automotive sector being designated a pillar industry as somewhat onerous, although Ford's Stephanie Hallford says Ford is pleased with its joint ventures and not worried about gaining the right to 100 percent ownership of factories. Hallford identifies macroeconomic policies as a key company concern, saying Ford would like to see credit freed to stimulate demand; both Hallford and Hawkins mention high taxes as particular concerns.

As a larger problem facing the auto industry, Hallford emphasizes auto infrastructure. In areas ranging from roads to parking lots, China is not equipped to handle a consumer boom in cars. Indeed, the major cities are already burdened by heavy traffic -- although nowhere near the nightmare traffic of Bangkok or Seoul -- and taxis appear to far outnumber private cars. Ford has convened major workshops with the government to address these issues, Hallford says. The industry has even lobbied for strengthened pollution standards, recognizing that in China's heavily polluted cities, high-polluting cars would contribute to a public health disaster of such magnitude that industry sales might be threatened. Earlier this year, following recommendations from the foreign auto industry, China announced a phase out of leaded gasoline.

Other issues raised by corporate representatives based in China include technology transfer obligations, foreign currency balancing requirements, battles over operational control with joint-venture partners, the right to service products sold in China, the ability of businesses to retain employees and the transparency of regulations (meaning whether they are published and clearly stated).

In general, the U.S. business interests in China are optimistic about the eventual resolution of their concerns, on terms favorable to foreign investors. Those U.S. corporate representatives in China -- rather than those lobbying on their behalf back in Washington -- express a palpable excitement about prospects in China. "China is the most exciting market in the world," says Dianne Terry, managing director for Hill & Knowlton in Beijing.

If the China Lobby is able to have nearly as much success in opening the Chinese market as it has had in opening the U.S. market to goods made in China, China will indeed be the world's most exciting market for U.S. multinationals, for many years to come.

The consequences of this opening for the Chinese people is another matter altogether.

TOP 20 U.S.-CHINA BUSINESS COUNCIL POLITICAL ACTION COMMITTEE & SOFT MONEY CAMPAIGN CONTRIBUTORS,1996 CYCLE*
Rank	Company	Total	Dems	Repubs
1	Philip Morris**	$3,900,655	$737,216	$3,162,439
2	AT&T**	$2,310,756	$921,147	$1,389,609
3	Joseph E Seagram & Sons**	$2,034,345	$1,289,450	$744,895
4	Federal Express Corp**	$1,921,525	$875,125	$1,045,400
5	Walt Disney Co**	$1,478,450	$1,114,550	$363,900
6	Lockheed Martin**	$1,373,335	$488,950	$884,385
7	BellSouth Corp**	$1,242,761	$404,480	$836,781
8	General Motors**	$1,162,358	$274,825	$887,033
9	Chevron Corp	$1,075,258	$211,550	$863,708
10	SBC Communications	$965,818	$364,585	$601,233
11	Textron Inc	$943,800	$382,200	$561,600
12	Eli Lilly & Co	$931,991	$293,350	$638,641
13	Archer-Daniels-Midland Co**	$917,976	$419,500	$498,476
14	Anheuser-Busch**	$892,507	$452,057	$440,450
15	Northrop Grumman Corp	$883,525	$308,750	$574,775
16	Tenneco Inc	$847,270	$261,800	$585,470
17	Coca-Cola Co**	$844,372	$239,940	$604,432
18	General Electric**	$816,409	$331,809	$483,600
19	Boeing Co	$802,055	$238,200	$563,855
20	Pfizer Inc**	$774,995	$167,930	$607,065

**Includes more than one contributor affiliated with the organization.

*PAC and soft money contributions are based on data downloaded from the Federal Election Commission on 5/1/97 and are inclusive through 12/31/96. This chart is based on the list of member firms of the United States-China Business Council.

Source: Center for Responsive Politics.