On 24 January 1980, the US congress passed a trade agreement which conferred a ‘Most Favoured Nation’ (MFN) status upon the People’s Republic of China. This was particularly significant as it meant that Chinese exports to America would from then on be exempt from the high tariff rates stipulated by the Smoot–Hawley Act of June 1930, a concession usually reserved for America’s ‘friends’ in the trading sphere. As negotiated, Beijing reciprocated by granting an MFN status to the US as well. These developments, which came just a year after the formal normalization of diplomatic ties, marked the high point of a decade-long US–China rapprochement, which began with the so-called ‘ping-pong’ diplomacy of 1971. It was engendered by a mutual need to balance the Soviet Union that had achieved nuclear parity with the US, and had been testing China’s northern borders since the 1969 Ussuri River clashes.
By the late 1970s, China, now led by Deng Xiaoping, who was once a pariah in Mao’s Cultural Revolution, had turned to the US for a technology and trade relationship that would help reinvigorate its economy and restore the confidence of the populace in the communist governance model. Since 1978, China, under Deng, had begun a programme of economic reforms called ‘Socialism with Chinese Characteristics’ that included the liberalization of trade and investment norms. Beginning in 1980, foreign investment was permitted in four special economic zones (SEZs) on the country’s eastern seaboard, with three being in the province of Guangdong and one in Fujian. These SEZs were
meant to position China as a new location for the global processing trade, that had begun in the 1970s, when American companies started moving consumer goods production overseas to destinations that had abundant cheap labour. Speaking to journalists in 1980, Deng gave the following rationale for establishing these zones:
Technology, science and even advanced production management, which is also a kind of science, will be useful in any society or country. We intend to acquire technology, science and management skills to serve our socialist production.
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It was another matter that American companies weren’t really looking to share advanced technology with low-cost offshore destinations that were meant to service the country’s rising overconsumption. This is precisely why US enterprises were allowed to operate in China only through joint ventures with domestic companies or government organizations. The idea was that the foreign partner would bring technology and expertise, and the domestic partner would, in exchange, smoothen out the system, as it were. Chinese complaints about inadequate technology-sharing by the US were, however, a common feature throughout the 1980s.
Nonetheless, the country’s trade with the US increased sevenfold, from $1 billion in 1978 to $7 billion in 1985. By the mid-1980s, many more coastal SEZs would crop up, and since increased US economic interaction with China served as a bellwether for the latter’s emergence on the world trading scene, overall Chinese trade increased almost threefold – from $20.6 billion to $60.2 billion during 1978–85, mainly in the direction of Europe and East Asia. Wherever the US went, Western Europe and East Asia seemed to follow. In fact, though American investment was very important, the top two investors in China during this period were Hong Kong and Macau, with the US trailing in third place. China’s export-oriented processing trade saw it receiving capital from East Asian Chinese, who were now keen to tap into the newest low-cost destination for final processing in the region.
As the Cold War heightened under the Reagan administration through the 1980s, China’s attraction as a location for offshoring labour-intensive, high-volume production increased. Moreover, it freed up US workers for employment in lucrative primary sectors and military industries. This is reflected in the fact that textiles and clothing accounted for more than 40 per cent of the total value of Chinese exports to the US by the second half of the 1980s. It rose from being America’s 28th most important trade partner in 1980 to being the 10th in 1990. Cold War balancing and thicker trade ties contributed to the Reagan administration relaxing controls on the export of advanced technology to China by putting such exports under category ‘V’ in 1983 – a level of control reserved for American allies. This paved the way for more such transfers of technology. In the 1980s, on five occasions, China would notch up annual GDP growth rates exceeding 10 per cent. The Chinese miracle was under way.
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The China Price
The tragic events of 4 June 1989, when Chinese tanks rolled down Tiananmen Square to suppress the protests led by students and workers, did serve as a speed bump in its relationship with the US. In the wake of the incident, the US imposed sanctions on China, which led to a decline in bilateral trade volumes in 1990 – a first in two decades. The economic conditions, which served as the background for the Tiananmen Square protests, also served to temporarily weaken the power of Deng and his reformers. The path of reform that had boosted growth to double-digit levels had also led to a credit glut and a housing boom, which had sent inflation soaring to 18.5 per cent in 1988. Tens of millions of workers flooded into the cities, with students marching with them in solidarity. Socialist hardliners within the CPC held hasty reforms responsible for the upheaval.
Deng chose to step down from his official position and retire from public life after 1989. But in 1992, he conducted his famous ‘Southern Tour’ of SEZs in southern China, in which he extolled the virtues of continuing on the path of reform. While the audience was national, the settings he chose to make his point were precisely those places on China’s eastern seaboard that had gained the most from liberalization and trade. Deng now chose to use them to highlight what was possible by declaring that ‘some areas must get rich before others’. The idea being that the country’s coastal provinces would become prosperous first, via liberalization and export processing trade, in order to provide the resources and demand for pulling up the rest of the country. It is believed that the Southern Tour played a vital role in ensuring China continued down the path of economic reform and trade integration.
From around 1993, inward FDI into China started climbing rapidly – most of it unsurprisingly directed towards those very coastal provinces that had already proven their mettle in the processing trade, with light manufactures and textiles. But this time, a chunk of the FDI was headed into mechanical components and electronics industries. Once again, though, the US investment was important – majority of the inward investment actually came from China’s East Asian export-oriented predecessors that were themselves looking for a cheaper location. Taiwan and Japan began to greatly increase their investments into the country as a final processing centre for assembling and shipping goods to the West.
Japan, and to a lesser extent Taiwan, would supply intermediates and components that would be put together by the Chinese for final export to the US. And this supply chain relationship would be reflected in bilateral trade balances, with the country beginning to run a significant trade surplus vis-à-vis the US, while experiencing a trade deficit with respect to Japan and Taiwan. In the years ahead, state-enforced worker discipline, abundant migrant labour, excellent infrastructure, export subsidies, cheap credit, tariff exemptions for intermediate imports, plus a scant regard for environmental externalities, all contributed towards the emergence of the dreaded ‘China Price’. Godless China was truly a godsend for Western capitalism.
Excerpted with permission of Hachette India from Negotiating the New Normal: How India Must Grow in a Pandemic-Ridden World by Saurav Jha.