CHINA-U.S. RELATIONS

Terror Throws Us Together, For Now

At their first summit the leaders of China and the United States began building a better relationship that can only benefit business. To deliver real rewards for both China's economy and foreign investors, it needs to last longer than U.S. retaliation in Afghanistan

By Michael Vatikiotis, Ben Dolven and David Murphy/SHANGHAI

Issue cover-dated November 01, 2001

AGAINST THE BACKGROUND of apprehension in Asia over the United States-led "war against terrorism," the glimmer of a silver lining has appeared. President George W. Bush's visit to Shanghai forged a new spirit of partnership and amity with Beijing that would have been unthinkable before the events of September 11.

It's ironic this happened under a U.S. administration that set out this year to demolish former President Bill Clinton's notion of a "strategic partnership" with China, preferring instead to frame Beijing as a "strategic competitor." What a difference a crisis makes, especially one as big as the attacks of September 11. "I think a new partnership is going to evolve over time--and as we get over the bumps of the last year," says a Bush administration official.

Describing this as the "silver lining" to the aftermath of the carnage in New York and Washington, the U.S. official notes that the China-U.S. relationship is now warming up on the security front--as well as in terms of trade and business.

If it lasts, the new partnership will indeed boost business. On the fringes of the first meeting between Bush and President Jiang Zemin, major U.S. corporations including Microsoft, Applied Materials, Hewlett-Packard and General Motors all announced greater investments in China. Sandra Kristoff, a former U.S. administration official who is now a senior executive of insurance giant New York Life, went so far as to call 2001 "the year of China." So for the many businesses banking on China's economic strength to stave off recession, it's critical that the improved relationship is more than temporary.

That's hard to predict. The new warmth comes from a single issue--terrorism--that for the moment has pushed all outstanding problems aside. "Just because Beijing is walking lockstep with Washington on this doesn't mean there's new dawn," warns Richard Brecher, Motorola's director for international trade relations.

But China has clearly seized the opportunity--one that helps underpin its economic growth and its diplomatic aims to meet Jiang's great-power ambitions. To do this, Beijing needed to swing unconditionally behind the U.S. war against terrorism. And it's obvious from what U.S. officials say that not only is China offering moral and political support, but also, unusually, a degree of active cooperation. "The Chinese have been very helpful on the intelligence and information front," a senior administration official says. "In some ways, we believe that's the most useful thing that China could do."

Perhaps the most remarkable evidence of a shift in the tenor of the relationship was Bush's failure to react to something that had happened before his three-hour meeting with Jiang. With Beijing blocking Taiwan's choice of its representative, the island's delegates walked out of the 21-member Asia-Pacific Economic Cooperation forum that was the backdrop to the U.S.-China summit.

Earlier this year Bush had vowed that Washington would do "all it takes" to defend Taiwan. But when he met Jiang, instead of rallying to Taipei's defence, Bush simply reaffirmed the "one-China" policy. Moreover, U.S. officials noted nothing was left of the mutual acrimony that took relations to the brink of a new Cold War after a U.S. surveillance aircraft collided with a Chinese fighter near Hainan island on April 1. "Both sides believe that is an issue that is behind us," says the senior administration official.

For his part, Jiang burnished his credentials as a statesman. Hosting the Apec summit was a feather in his cap before he steps down as Chinese Communist Party general secretary next year and president in 2003. Most analysts see Jiang as seeking to keep a paramount leadership role. Shen Dingli, deputy director of the Centre for American Studies at Shanghai's Fudan University, says a public perception that it can build a healthy and stable relationship with the U.S. "would help the current leadership arrange the succession more smoothly."

Throughout the uproar since September 11, Jiang has made strenuous efforts to appear as a responsible global leader, calling around the world to speak with concerned heads of government and suppressing nationalist urges to take advantage of America's misfortune--even ordering the media to tone down palpable anti-American sentiment. China and the U.S., he said after meeting Bush, "are two countries with significant influence in the world. As such, we share common responsibility and interest in maintaining peace and security in the Asia-Pacific." Observers see such rhetoric, and Beijing's cooperation with the U.S.-led coalition, as evidence that Jiang is using the crisis to elevate his stature as a world leader and reinforce his legacy at home.

The biggest winners in this new friendly atmosphere will be foreign business interests and China's economy. Better, more stable, more predictable relations will go far in helping big investors make big-project decisions. "China continues to improve its predictability," says James Morgan, chairman of Applied Materials, the world's largest supplier of semiconductor-making equipment. "The issue that chip people always have is: 'Are you willing to commit to a billion-dollar plant?'"

U.S. business in China, of course, has shown some immunity from the ups and downs in bilateral ties. Motorola, for example, did $1 billion in infrastructure business in China in the three months after the Hainan incident. But with the rest of the world heading into recession, the importance of China's economy as a safe haven is even starker than during better times. China's projected growth rate of more than 7% is not expected to be dented much by the fallout of the attacks in the U.S. It will perhaps lose as little as half a percentage point in GDP growth, says Australian economist Chris Findlay of the Pacific Economic Cooperation Council.

In this respect, the new Bush-Jiang rapport offers the hope that political risk will be better managed. Take the view of FedEx Corp. Chairman and Chief Executive Frederick Smith, who was in Shanghai to attend a business leader's meeting on the fringes of Apec. "After September 11, I don't think there's quite the opprobrium of China's human-rights transgressions in the eyes of some--as the U.S. deals with a set of issues it never had to deal with," he told the REVIEW. He cites problems such as internal security and terrorism that are now shared, albeit awkwardly, by the two powers. Or as Wang Zukang, chairman of the Chinese trading conglomerate Orient International, puts the Chinese point of view: "After [September 11] the U.S. has neglected issues like Taiwan and human rights and we see an opportunity to develop our relationship."

There's also a perception that China and the U.S. now chime on the idea of a multilateral approach to dealing with world problems. Says FedEx's Smith: "The way President Bush and his team have handled the September 11 situation has given people in China, and elsewhere for that matter, a lot of confidence that the U.S. is not a go-it-alone sort of cowboy administration." Chinese observers see Washington's policy in much the same light. "Bush realizes the need for international cooperation, forcing him to move away from unilateralism toward more cooperation," says Shen Dingli of Fudan University.

NEITHER SIDE GIVES IT ALL AWAY
With Washington keeping the coalition against terror together using smart diplomacy, there are concrete benefits on the economic front. U.S. trade officials anticipate smooth passage through Congress of legislation to give the Bush administration authority to negotiate broad new trade agreements. China's impending entry to the World Trade Organization has lent impetus to agreeing on a new trade round at a WTO ministerial meeting from November 9-13. "On the trade side, what was not possible prior to [September 11] is now possible," Smith says.

Washington, however, isn't giving up all of its leverage over China. Bush opted in Shanghai to hold back on official certification of China's accession to the WTO. Officials cited outstanding insurance and agriculture questions. A report that Washington was ready to waive sanctions imposed on Beijing after the June 1989 crackdown on student demonstrators in Tiananmen Square was hurriedly denied--though some commercial restrictions will be eased.

Like Bush, Jiang was careful not to give everything away. He gently reminded Bush about the thorny issue of U.S. arms sales to Taiwan. Possibly to allay the concerns of China's regional neighbours, he also told Bush that the strike against Afghanistan should avoid civilian casualties. There are limits to how long a campaign in Afghanistan can be stomached by China, sensitive as it is to the assertion of U.S. military might along its western border. Already, some analysts wonder what will become of a Chinese security cooperation framework that since June has embraced Russia and four Central Asian states.

And the question of "who is a terrorist" could still create friction. Even with Bush in Shanghai, China used a broad brush to paint all supporters of an independent state in its northwest as "a terrorist force whose aim is to split China." Jiang and Russian President Vladimir Putin agreed that both the Chechens and those who want to create an "East Turkestan" state in the Chinese region of Xinjiang "personify international terrorism and should be sternly opposed and crushed." Bush made no public comment on Chechnya or Xinjiang.

Despite such potential hurdles, the gloomy economic picture outside China may have carried as much weight for Beijing as politics. "If U.S. consumer confidence does not return the U.S. may have a recession and the Chinese economy is interdependent to an appreciable extent," says Shen Dingli. With $120 billion in annual trade between both countries, American Chamber of Commerce Chairman Steve Van Andel says: "There's no choice but to have a better economic relationship." The post-attack environment has already dented China's export growth. Says Mustafa Mohatarem, chief economist for General Motors: "Risk premiums have risen across the board, so there will be some slowdown in foreign direct investment."

That said, U.S.-China ties have long been hostage to extremes of political opinion in the United States. Behind the new cordiality in Shanghai, there remain concerns in Washington about China's military posture against Taiwan, that U.S. technology is helping China to build a formidable fighting force, and that sidling up to China sends the message that human rights can be abused.

Once the smoke of war clears, a hawkish lobby in Washington is set to remind the administration of what it perceives as the China threat--a viewpoint that powerful members of the Bush team had been largely in accord with until September 11. Two commissions mandated by Congress are gearing up to monitor U.S.-China ties. Both are stacked with long-standing China critics.

Taiwan, technology and human rights will be addressed in the commissions, which grew out of the acrimonious debate over permanent normal trade relations approved by the Congress last year. The Congressional-Executive Commission on China was set up to monitor the human-rights situation and is chaired by Sen. Max Baucus, a Democrat from Montana known to be sympathetic to China's concerns. More of a worry for the business lobby is the lesser-known U.S.-China Security Review Commission. Established in October last year, it must produce an annual report to Congress on the implications and impact on U.S. national security of bilateral trade and economic ties. It began hearings in mid-June.

TESTS TO A NEW FRIENDSHIP
Among the tasks stated in the commission's charter is the monitoring of whether Chinese trade and investment patterns harm U.S. national security interests. It also has a mandate to check on "the extent to which the trade surplus of the People's Republic of China with the United States enhances the military budget of the People's Republic of China." If that suggests trouble, the composition of its membership scares the business community--many of the 12 members have well-known hardline views on China.

Also on the horizon are disputes with the U.S. over trade barriers after China joins the WTO. Baucus was one of two U.S. senators who wrote to Bush this month complaining that biotechnology rules being drawn up by Beijing and new quarantine restrictions had sent soya-bean prices to new lows. The senators said that these Chinese steps amounted to new market barriers, which set a poor precedent for Chinese compliance with WTO obligations.

There is little doubt that both sides regard the current warming of ties as a means to push extremist views away from the centre of the relationship. The trick will be to control the level of static. What is not clear is how far Beijing's cooperation with Washington will extend beyond the stated U.S. goal of toppling the Taliban in Afghanistan. Says Robert Kapp, head of the United States-China Business Council: "There still exists the possibility of a very serious degradation of U.S.-China relations if expectations are disappointed."