To Promote U.S.-China Trade, Repeal Jackson-Vanik

by James Dorn

James A. Dorn is a China specialist at the Cato Institute and coeditor of China's Future: Constructive Partner or Emerging Threat?

July 14, 1999

The annual debate in the United States over China's trade status, necessitated by the Jackson-Vanik amendment to the Trade Act of 1974, should be ended in favor of establishing permanent "normal trade relations" (NTR) with China. Congress should repeal the Jackson-Vanik amendment as a relic of the Cold War.

That amendment was designed to deny most-favored-nation (MFN) trade status to communist countries, notably the Soviet Union, in order to encourage more open emigration. In fact, Jackson-Vanik was not an important factor in the collapse of the Soviet Union and is unsuitable for China. To deny people the right to trade because their government denies them the right to emigrate is a lose-lose policy for promoting human rights.

President Clinton's decision in 1994 to de-link trade and human rights and the decision of Congress in 1998 to substitute NTR for MFN were steps in the right direction. Now Congress must act to reduce uncertainty in U.S.-China economic relations by ending the annual re-certification spectacle and making NTR unconditional and permanent. Both Hong Kong and Taiwan support such a move and would benefit from it.

The U.S. is the only major country that does not afford the People's Republic of China permanent NTR. Under Jackson-Vanik, any "non-market economy" (NME) that restricts free emigration, as determined by the President, cannot be granted NTR tariff treatment (i.e., cannot be given the same low tariff rates available to more than 160 countries that have normal trade relations with the U.S.). However, even if emigration is not totally free, the President may recommend NTR, assuming it would lead to freer emigration policies.

Clearly, Jackson-Vanik is an anachronism. China is no longer a non-market economy--most prices are now determined by market forces, not by government planners. Moreover, from a practical standpoint, no one believes that the U.S. is going to allow millions of Chinese people to emigrate to the U.S. Requiring Beijing to have an open emigration policy is nonsensical as a condition for NTR.

Why does Congress persist in maintaining an outdated trade law? That's easy: the annual debate over U.S.-China trade relations gives politicians on both sides of the aisle the chance to criticize Beijing's violation of human rights and to re-examine overall U.S.-Chinese relations. Those are worthy goals but could be achieved without denying China permanent NTR.

Too often the re-certification process has been used to bash China and to threaten a trade war. This ignores the substantial progress that has been made since that nation began opening to the outside world in 1979. The freer flow of goods and ideas, greater labor mobility, expansion of non-state enterprises, and right to travel have increased freedom and prosperity in the Middle Kingdom.

Denying China NTR would raise tariffs to prohibitive levels and bring U.S. China trade to a halt. Even the threat of doing so damages trade relations and strengthens the position of hard-liners. When future trade relations are uncertain, investors will demand higher returns. The reduction in overall investment will slow China's growth and harm the very people in the non-state sector who have been the driving force in moving the PRC toward a market system.

Australia and the European Union recognize China as a market economy, the U.S. should do the same. Over 90 percent of retail prices and more than 80 percent of agricultural and raw material prices are market-determined. Recent estimates, reported in the latest China Economic Quarterly, suggest that the private sector now accounts for 53 percent of China's economy.

By repealing Jackson-Vanik, Congress could give a jump start to U.S.-China trade and send a clear signal to Premier Zhu Rongji that we are ready to accept the major concessions he offered during his April 1999 visit to the White House.

Bringing China into the WTO should be done on the basis of general principles, especially the principle of non-discrimination. The same accession criteria should be applied to China as to other nations. Instead, Congress has used Jackson-Vanik to politicize trade and to bring issues to bear on granting China permanent NTR--an essential element of WTO membership--that are far-removed from the letter of the law.

The U.S. policy of engagement should not become a scapegoat for protectionists. The fact that China is still not a free country after more than 20 years of trade liberalization does not mean that engagement has failed--it simply hasn't gone far enough. Anyone who has visited China's thriving coastal regions and vibrant cities knows that most people are far better off today than under Chairman Mao.

China cannot be painted black and white. As William McGurn writes in the July issue of The American Spectator, "Repression and corruption continue, yet China grows freer, more prosperous, and more modern each day." Ned Graham, president of East Gate International and son of evangelist Billy Graham, agrees: "We have witnessed a dramatic increase in personal freedoms for the Chinese."

Corruption persists because China's legal system is vastly underdeveloped--economic life is not yet guided by the rule of law. So long as the Communist Party controls key aspects of the economy, there will not be a clear dividing line between political and economic decisions. "Market socialism" will prevail and hinder the development of market liberalism. That is why it is crucial to minimize the power of the Party by growing the non-state sector and opening the domestic economy to competition from abroad.

Repealing Jackson-Vanik would open the door for China's accession to the WTO and give Beijing confidence that the U.S. is interested in peace and prosperity, not in a search for a post-Cold War enemy. As a member of the WTO, China would be more likely to develop into a law-abiding nation and cultivate an ethos of liberty than if it were isolated.

The rise of China's market economy has already influenced people's thinking about the role of property. Under Mao-style communism, private property was viewed as evil, now it is recognized in the Chinese Constitution. Today property rights are increasingly being seen as important human rights that allow individuals to pursue their own happiness while serving others through voluntary exchange.

The publication of a Chinese edition of F.A. Hayek's The Constitution of Liberty has contributed to a wider understanding of the idea of spontaneous order and has shown the importance of limited government (rule of law) for civil society. As Deng Zhenglai, the translator of Hayek's book, recently stated, "The importance of property is that it provides a private sphere, which provides for the possibility of a civil sphere. It means you diffuse the sources of knowledge and information and not leave the state with a monopoly on knowledge production."

The idea that order can arise spontaneously if people are bound by general rules that protect their rights to life, liberty, and property is not new to China. In the Daodejing, written more than 2,000 years before Adam Smith's Wealth of Nations, Lao Tzu instructed the sage (ruler) to adopt the principle of noninterference as the best way to achieve happiness and prosperity:

Administer the empire by engaging in no activity.
The more taboos and prohibitions there are in the world,
The poorer the people will be.
The more laws and orders are made prominent,
The more thieves and robbers there will be.
Therefore, the sage says:I take no action and the people of themselves
are transformed.
I engage in no activity and the people of themselves become
prosperous.

Congress should heed that advice by repealing Jackson-Vanik and seek other routes to discipline Beijing--for example, by following the recommendation of Senator Spencer Abraham (R-MI), in a bill introduced last year, that government-to-government aid be withheld from countries with human rights violations. Under that policy, the recent decision of the World Bank to provide millions of dollars to "resettle" Han Chinese into Tibetan areas would not be tolerated.

Instead of focusing on emigration, Congress should focus on immigration and continue to provide a sanctuary for the victims of human rights violations in China and elsewhere. The number of refugees admitted into the United States each year is determined by consultation between the president and Congress. In that process, Congress should be open and generous. Providing an exit option for those fleeing tyrannical regimes will send a clear message that America is still the land of the free.