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10/05/2000

China Update, Part I

"We will find, I believe, that America has more influence in
China with an outstretched hand than with a clenched fist."
--President Clinton, upon passage by the U.S. Senate of the
Permanent Normalized Trade Relations Act (PNTR) with China.

Of course, there is more to the China story than PNTR and their
imminent full admittance to the World Trade Organization.
[Expected by year end upon completion of side agreements with
Mexico and Switzerland.] You also have to deal with the issues
of Taiwan, and the general state of relations between China,
North and South Korea, Japan and the United States.

First off, trade. The U.S. trade deficit with China was some $36
billion for the first six months of 2000, and should handily break
last year''s record of $68 billion. With PNTR, U.S. exports are
expected to double in 5 years from $14 billion to $28 billion.
But imports will continue to soar, as well.

You don''t get such a large deficit without some major
discrepancies in the components of trade between the two. For
example:

--In 1998 (the last full year for which there is a total accounting),
the U.S. imported $12.8 billion of electrical machinery and
equipment from China, while sending only $1.8 billion of similar
goods over there.
--Power generation equipment - the U.S. imported $7.6 billion,
exported just $2.7 billion.

One could go on and on. PNTR and WTO were inevitable steps,
but expect China''s compliance to be spotty. And there is a very
real worry that China is ill-prepared to face global competition.

The big fear is what will happen in rural China, the hinterlands,
where some 900 million of China''s 1.3 billion live...these are the
peasants. True globalization could lead to seismic shifts and the
Communist government obviously cannot allow massive unrest.
Agriculture is a major concern, for example, where duties for
farm products will fall sharply from as high as 85% to 18% in
some cases, plus import quotas will disappear. In addition, while
international confidence in China''s major banks may remain
high, below the surface there are very real problems with China''s
rural credit cooperatives, the main banking option for farmers.
The government is infusing the co-ops with capital, recognizing
the danger if this key link is broken.

And the New York Times Craig Smith adds that the WTO''s rules
are often very vague.

"Despite China''s scramble to create a body of laws compatible
with those rules, the interpretation of the laws will be left up to
government agencies or local authorities that often have their
own interests at stake."

The difference in living standards between rural and city
dwellers is stark. Urban workers make 4 times as much as the
farmers, one of the largest such gaps in the world. And there is
much for the poor to fear in free trade.

John Pomfret quotes a Chinese sociologist who addresses the
issue.

"(The) social consequences will be profound...As foreign
imports begin to flood the Chinese market, millions of Chinese
farmers and workers will be made redundant, thus deepening the
urban-rural divide, widening regional disparities, exacerbating
tensions between social groups and thereby making overall
inequality even worse."

Add to that the fact that in some cities, unemployment is already
more than 25%. And displaced rural laborers will find it even
more difficult in the future. Said one steel worker, "It''s going to
squeeze me to death. You think our factory can compete with
South Korean steel? What a joke. They are going to squash us."

The Chinese government has a potentially explosive situation on
its hands. Which not only means they will go slow in complying
with WTO regulations, they may also need to divert the nation''s
attention by appealing to their nationalistic spirit.

President Clinton commented on the impact of PNTR on China''s
future.

"It will strengthen those within China who fight for higher labor
standards, a cleaner environment, for human rights and the rule
of law." Then he quickly adds, "(though) none of us should
think for a moment that any of these outcomes are guaranteed."

That''s for sure. On Tuesday, Taiwan''s premier resigned after
just 4-plus months in office. Taiwan''s new leadership is clearly
struggling. Forgive me for cutting this week''s missive short, as I
will study some of the Taiwanese government problems and
report on those in our China update, Part II, next week.

Sources for Parts I and II:

Peter Kien-Hong Wu / Defense News
David Sanger / New York Times
Rose Brady / Business Week
Craig Smith / New York Times
John Pomfret / Washington Post
Calvin Sims / New York Times
Matthew Vita / Washington Post

Brian Trumbore


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10/05/2000

China Update, Part I

"We will find, I believe, that America has more influence in
China with an outstretched hand than with a clenched fist."
--President Clinton, upon passage by the U.S. Senate of the
Permanent Normalized Trade Relations Act (PNTR) with China.

Of course, there is more to the China story than PNTR and their
imminent full admittance to the World Trade Organization.
[Expected by year end upon completion of side agreements with
Mexico and Switzerland.] You also have to deal with the issues
of Taiwan, and the general state of relations between China,
North and South Korea, Japan and the United States.

First off, trade. The U.S. trade deficit with China was some $36
billion for the first six months of 2000, and should handily break
last year''s record of $68 billion. With PNTR, U.S. exports are
expected to double in 5 years from $14 billion to $28 billion.
But imports will continue to soar, as well.

You don''t get such a large deficit without some major
discrepancies in the components of trade between the two. For
example:

--In 1998 (the last full year for which there is a total accounting),
the U.S. imported $12.8 billion of electrical machinery and
equipment from China, while sending only $1.8 billion of similar
goods over there.
--Power generation equipment - the U.S. imported $7.6 billion,
exported just $2.7 billion.

One could go on and on. PNTR and WTO were inevitable steps,
but expect China''s compliance to be spotty. And there is a very
real worry that China is ill-prepared to face global competition.

The big fear is what will happen in rural China, the hinterlands,
where some 900 million of China''s 1.3 billion live...these are the
peasants. True globalization could lead to seismic shifts and the
Communist government obviously cannot allow massive unrest.
Agriculture is a major concern, for example, where duties for
farm products will fall sharply from as high as 85% to 18% in
some cases, plus import quotas will disappear. In addition, while
international confidence in China''s major banks may remain
high, below the surface there are very real problems with China''s
rural credit cooperatives, the main banking option for farmers.
The government is infusing the co-ops with capital, recognizing
the danger if this key link is broken.

And the New York Times Craig Smith adds that the WTO''s rules
are often very vague.

"Despite China''s scramble to create a body of laws compatible
with those rules, the interpretation of the laws will be left up to
government agencies or local authorities that often have their
own interests at stake."

The difference in living standards between rural and city
dwellers is stark. Urban workers make 4 times as much as the
farmers, one of the largest such gaps in the world. And there is
much for the poor to fear in free trade.

John Pomfret quotes a Chinese sociologist who addresses the
issue.

"(The) social consequences will be profound...As foreign
imports begin to flood the Chinese market, millions of Chinese
farmers and workers will be made redundant, thus deepening the
urban-rural divide, widening regional disparities, exacerbating
tensions between social groups and thereby making overall
inequality even worse."

Add to that the fact that in some cities, unemployment is already
more than 25%. And displaced rural laborers will find it even
more difficult in the future. Said one steel worker, "It''s going to
squeeze me to death. You think our factory can compete with
South Korean steel? What a joke. They are going to squash us."

The Chinese government has a potentially explosive situation on
its hands. Which not only means they will go slow in complying
with WTO regulations, they may also need to divert the nation''s
attention by appealing to their nationalistic spirit.

President Clinton commented on the impact of PNTR on China''s
future.

"It will strengthen those within China who fight for higher labor
standards, a cleaner environment, for human rights and the rule
of law." Then he quickly adds, "(though) none of us should
think for a moment that any of these outcomes are guaranteed."

That''s for sure. On Tuesday, Taiwan''s premier resigned after
just 4-plus months in office. Taiwan''s new leadership is clearly
struggling. Forgive me for cutting this week''s missive short, as I
will study some of the Taiwanese government problems and
report on those in our China update, Part II, next week.

Sources for Parts I and II:

Peter Kien-Hong Wu / Defense News
David Sanger / New York Times
Rose Brady / Business Week
Craig Smith / New York Times
John Pomfret / Washington Post
Calvin Sims / New York Times
Matthew Vita / Washington Post

Brian Trumbore