China Relations Require Wisdom and a Strong Hand

0 Comments | Insight on the News, May 14, 2001 | by Jamie Dettmer

Far from being a "national humiliation," as some in the conservative media suggested it threatened to become, the standoff with China handed George W. Bush his first foreign-policy success. But the awkward challenge by Beijing remains, and there is unresolved business from the confrontation, including how to ensure that China pays an appropriate price for the incident.

In the wake of the confrontation, there is consensus in Washington that Beijing mustn't be appeased. On April 15, a couple of days after the flight crew was released, a parade of senators from both parties took to the airwaves to exclaim darkly about imposition of various punishments on Beijing. According to White House sources, Bush fully intends to do so. But the question remains, as ever, how to restrain America's prickly would-be rival in Asia in ways that don't hurt U.S. businesses and consumers and that avoid playing into the hands of the confrontation-seeking military in Beijing.

While Bush is basking in praise, fights about China policy are on the near horizon. These will involve sanctioning China through trade or limiting Chinese access to U.S. capital markets. A third that also is likely to cause friction between the White House and China hawks in Congress: what to supply Taiwan in the way of sophisticated weaponry. On the latter point the administration may disappoint the hawks and fail to provide destroyers equipped with the Aegis antimissile defense system. But there will be enough military goodies to placate most hawkish critics.

Already, some lawmakers are gearing up to try to prevent the June renewal of China's permanent trading status with the United States, but the move likely will fail. With many American jobs at risk, as well as the interests of corporate America involved, the administration will oppose such a move and the votes probably won't be there, although the congressional debate will be fierce.

The more intriguing fight likely is to come over what some hawks believe would be the most effective and painful punishment: introducing transparency and disclosure rules for Chinese firms seeking to raise funds in U.S. capital markets and possibly restricting some altogether from the markets. This has come up before, notably in 1997 when a get-tough-on-China bill aimed at restricting Beijing's ability to tap U.S. capital was introduced in Congress by then-lawmakers Sen. Lauch Faircloth, R-N.C., and Rep. Gerald Solomon, R-N.Y.

China hawks maintained the U.S. Market Securities Act, if passed, would have provided both a national-security protection and a safeguard for taxpayers by creating a screening process at the Securities and Exchange Commission to monitor fund raising by firms owned by the Chinese government or its People's Liberation Army (PLA). They maintained that close to $7 billion of the funds raised by China in the form of bonds was being used by the PLA to further its military agenda. Opposition from the Clinton White House, Federal Reserve Chairman Alan Greenspan and Wall Street doomed the bill, which died in committee. Two other similar bills, one cosponsored by Sen. Max Baucus of Montana, now the ranking Democrat on the Senate Finance Committee, met the same fate.

But that approach once again is being pushed -- this time by a curious alliance of human-rights groups, labor unions, environmentalists and conservatives organized by the William J. Casey Institute of the Center for Security Policy. For five years now, the Casey Institute has sought to alert policymakers to the growing challenge represented by "bad actors" raising funds in the U.S. debt-and-equities market -- in particular, focusing on Chinese oil companies operating in Sudan.

Arguing that the companies -- Canada's Talisman Energy and the China National Petroleum Co. -- are helping to finance the Sudanese Islamic government's vicious repression of Christians, the Casey Institute maintains that foreign oil companies should be discouraged from investing in Sudan by denying them access to the U.S. capital markets.

And believing that actions speak louder than words, the institute has managed, through raising a hue-and-cry, to reduce by half the funds Chinese interests sought to raise last year on the U.S. debt-and-equities market. Fearing bad publicity, state governments and mutual-fund and pension managers were loath to take up bond offerings or initial public offerings from Chinese firms.

In April, a paper recommending restricting China's access to U.S. capital markets was sent to the White House by the Casey Institute's Roger Robinson, a Reagan economic-warfare aide who now sits on the U.S.-China Security Review Commission that is to report to Congress next year, or possibly earlier. The paper has prompted White House interest, if for no other reason than that restricting access by communist enterprises to U.S. capital markets wouldn't affect current U.S.-China trade. Nor would it involve foreign allies -- but it could make life difficult for Beijing and the PLA.