China's tactical fumble - China's handling of spy plane accident may hurt its international relations

Business Asia, April, 2001

China took the high moral ground in the recent US spy plane drama. But many analysts think China may be the one who ends up being the loser from the incident.

WHEN US warplanes bombed the Chinese embassy in Belgrade two years ago, one of the first casualties were talks on China's entry in the World Trade Organisation (WTO), which were stalled for several months after the event.

China risks considerably more casualties this time around with the spy plane incident of this month -- not only is the timing of its WTO entry under threat, but its chances of securing the 2008 Olympic Games, its own economic stability, and relations with a new US administration could also take a battering.

Nervous business leaders on both sides of the China-US divide -- as well as a world anxious for unfettered access to Chinese markets -- are hoping Chinese President Jiang Zemin and his Government have not overplayed their hand.

At the time of publication, China was still holding a US spy plane which was forced to land on Hainan Island after a mid-air collision with a Chinese jet on April 1. The spy plane's 24 crewmembers were released after US President George Bush wrote a letter of regret for the incident.

Analysts say the crisis is apt to leave a lasting stain on US-Chinese economic relations, even if it soon fades from diplomatic radar screens. "It of course could rock the boat," said a Western diplomat involved in the WTO talks. "These sort of political issues coming out of the clear sky, how do you treat them? Two years ago in 1999, it poisoned the atmosphere of the multilateral," he said, referring to the Belgrade bombing when China was furious at all NATO members.

Hard liners on the US side have already called for a cooling of relations, with Henry Hyde, chairman of the US House International Relations Committee, raising the possibility of US retaliation, including slowing China's admission to the WTO and seeking to block it from hosting the 2008 Olympics. "There are lots of things we can do if we are driven to do it," he said.

WTO talks are already mired in a dispute between China and the United States over agricultural subsidies. Some analysts believe China may welcome an excuse to slow the negotiations even further.

In the short-term, China's trade relations with the US could suffer. The US Congress approved a bill last year that gave permanent normal trade relations, also called PNTR, to China, ending a two-decade annual ritual of reviewing China's trade status to guarantee Chinese goods the same low-tariff access to the US market as products from nearly every other nation. But PNTR was contingent on Beijing becoming a member of the Geneva-based WTO. Because those negotiations have dragged on longer than expected, Bush will be forced to seek a one-year extension of Beijing's trade benefits, setting the stage for another contentious congressional review.

China's early tough stance won widespread support at home, with China's campuses and internet chat-rooms buzzing with demands for an even tougher stance to avenge the loss of the Chinese fighter and its pilot.

Official outcry over US aerial spying on China has fostered growing resentment among Chinese, who already view US military support for Taiwan and plans to build an anti-missile shield in the Asia-Pacific as menacing.

"If you talk to the students here at Fudan University, they all feel angry with this and they question very much the US strategic intention toward China," Wu Xinbo of that Shanghai university's Centre for American Studies said.

But some Chinese feel their Governent capitulated too early in releasing the detained plane crewmembers. Throughout the crisis, China's Communist rulers worked hard to convince the country's 1.3 billion people it would not bow to a foreign power as their 19th century predecessors did.

One of the biggest risks for President Jiang Zemin was that he would end up looking weak in the eyes of an increasingly nationalistic public. Despite the letter of apology from the US, the initial reactions on the streets of Beijing to the resolution of the crisis were that China had not got enough in return for freeing the US crew.

For China's economic stability, the aftermath of the issue is critical. Much of China's growth these days depends on foreign direct investment. Businesses around the world invested US$40.8 billion ($82 billion) in China last year; one-tenth of that came from the US. If that investment ebbed very significantly, China's economy could falter.

The US also bought $101.1 billion worth of China's exports in 2000.

While sanctions wouldn't likely block it all, they could crimp US imports of some key Chinese goods. Delay in China's entry into the WTO could hurt investment, too.

Beijing has survived serious dust-ups with the US before. The 1999 allegations that China stole US satellite technology didn't dissuade Congress from granting it normal trade relations later. Neither did China's firing missiles near Taiwan in 1996.

"It's too early to tell" whether this face-off will do any permanent damage, said Jonathan Hill, a country-risk specialist for The PNC Financial Services Group. "We'll have to see how flexible they will be."