William Clarke is Director, People's Republic of China Affairs, Bureau of Fast-West Trade, U.S. De- A. OVERVIEW The visit of President Nixon to the People's Republic of China (PRC) in February 1972 and the resultant Shanghai Communique signaled the resumption of the Sino-American relationship dormant since Chinese troops had entered North Korea 22 years earlier. The historic relationship, sometimes unequal, had begun in 1784 with the call at Canton of the American vessel, Empress of China. Commencing in 1969 with the easing of travel and trade restrictions, the United States had indicated a desire to change its policy toward the PRC; the Shanghai Communique of February 1972 is the official expression of that change. About commercial relations the joint communique said: Both sides view bilateral trade as another area from which mutual benefits can be derived, and agree that economic relations based on equality and mutual benefit are in the interest of the peoples of the two countries. It was agreed that the progressive development of trade between the two countries would be facilitated. The policy enunciated in the Shanghai Communique has been reaffirmed by both sides on various occasions, especially during Secretary Kissinger's several trips to Peking. And, it has been reaffirmed by actual results in the commercial sector. Trade, which had been nonexistent in 1970, rose to $805.1 and $933.8 million by 1973 and 1974, respectively, with wheat sales, jet transport exports, and a number of other major contracts highlighting this unexpectedly rapid development. On the strength of Chinese purchases of American agricultural commodities, the United States has risen to the position of China's No. 2 trading partner in the last 2 years. A degree of normalization has been returned to the Sino-American commercial relationship. While trade has risen quickly to significant levels, while more and more American businessmen are traveling to Peking and to the Canton Trade Fair, and while liaison offices with commercial staffs have been opened in the respective capitals, certain unresolved issues clearly stand in the path of substantial further improvement in trading relations. Coupled with these commercial issues are some of the usual business problems occurring between trading partners everywhere, as well as some peculiar to United States-China trade. Resolution of the outstanding commercial issues will require negotiations between the two governments. Settlement of the issues of Chinese blocked assets and United States private claims would clear the way for further normalization of commercial relations. Unresolved, these issues prevent direct shipping and direct airline connections owing to the risk of attachment of flag carriers in satisfaction of claims. Direct banking is precluded and the exchange of trade exhibitions forestalled. Another major commercial issue concerns the extension by the United States of mostfavored-nation (MFN) nondiscriminatory tariff treatment to the PRC. PRC officials have raised the MFN issue with U.S. businessmen and others. Presumably, Peking not only wants MFN, but feels entitled to it as part of the Shanghai commitment to conduct trade. on the basis of "equality and mutual benefit." The Trade Act of 1974 provides a mechanism by which the United States could confer MFN status on China, but it is an act burdened with difficult requirements where the nonmarket economies of the socialist states are concerned. The facilitation of business continues with the National Council for United States-China Trade (National Council) and others providing substantial assistance to American importers and exporters. Analysis of commodities now moving in Sino-American trade suggests that there is sufficient growth potential in nonagricultural raw and semifinished materials and in advanced plant, equipment, and technology to warrant optimism in the future vitality of this commerce even though total trade turnover in 1975 will decline sharply owing to a steep drop in Chinese purchases of American agricultural products. Chinese foreign trade policy, while rooted in absolute control over all of the instrumentalities of trade and in the Chinese dictum of "self-reliance," explicity provides for the importation of foreign goods and technology. Thus, the prognosis for further improvement in business relations and in the growth of trade in the near future is favorable. Although there is improvement in the business climate, significant progress in the normalization of commercial relations is now dependent on resolving some of the key commercial issues. It is likely that considerable time would be required for these negotiations and, thus, it is not possible now to predict when they might be resolved by Washington and Peking. In the interim American business interests would do well to try to better understand the PRC and its trading institutions and practices so different from our own and those encountered elsewhere in market economies. It is worth reminding ourselves that of the principal nations of the world probably none is closer to economic self-sufficiency than China. The PRC is not a market for 50 million American automobiles or refrigerators, but a highly selective one entirely dependent on the dictates of Peking's planning. To be successful, and there are successful American businessmen in the China trade, one requires large amounts of patience and a fine appreciation of Chinese decisionmaking and commercial practice. B. COMMERCIAL RELATIONS: HISTORICAL The U.S. commercial relationship with China began in 1784, when the Empress of China called at Canton to unload a cargo of ginseng. Following in the wake of the flourishing Sino-British trade conducted by the East India Co., the United States reaped the benefits of England's “gunboat diplomacy." sending millions of dollars worth of silver to China during the 19th century for the purchase of Chinese tea and silk. The British had initiated trade in Canton by attacking the city with warships. In a determined fight against the Emperor's restrictive policies, the British pried the door open for all those who wished to trade with the Middle Kingdom. Earlier, in 1702, in response to the increasing nuisance of trading with foreigners, China had begun the Co-Hong or Factory system. By this arrangement direct contact with foreigners was limited to the sole agent at Canton and Amoy through whom foreigners had to buy and sell. In 1757 Canton was designated the only port at which foreigners could trade; the increased volume of trade there was han dled by an expanding Co-Hong system. Officially 13 in number, the Co-Hongs had become corporate bodies given an absolute monopoly on all dealings with foreigners. Opium War By the early 1800's, England was no longer satisfied with the restrictive Co-Hong system, and in 1839, incensed at the confiscation of opium, the English retaliated with armed force. Opium had been used as the chief financial means to offset Britain's imports from China, and constituted some 40 to 50 percent of China's imports. Enraged at its deleterious effects on both health and the outflow of silver, the Manchu Government had issued several edicts prohibiting its sale and had forced British traders to turn over opium to be burned. The ensuing struggle, known as the Opium War, resulted in the Treaty of Nanking of 1842 and substantially altered the Chinese structure for international trade. The Co-Hong system was abolished and five treaty ports were established as centers of trade: Shanghai, Canton, Ningpo, Foochow, and Amoy. Hong Kong was ceded to Britain as a free port, and China was required to pay $6 million for the confiscated opium. Two years later, China was also deprived of the right to fix customs duties, and a flat rate of 5 percent by value was imposed on all imports. During the next 70 years, over 50 commercial treaties and their amendments, including numerous unequal terms and clauses, were imposed on China. Extraterritorial rights allowed foreigners freedom from prosecution under Chinese law, internal waterways were opened to all vessels under foreign flag, and the "transit pass system" allowed cheap transport of foreign goods inside the country. The Treaty of Tientsin in 1858 specifically legalized traffic in opium. Following the 1895 war with Japan, the Treaty of Shimonoseki allowed construction of foreign factories in all treaty ports, 48 of which had been opened since 1842. This era of China's history has been aptly called a period of submission and subjection. Early 20th Century Trade American participation in the "partitioning" of China was minimal, but the United States did acquiesce in the division of China into "spheres of influence." In 1899 the United States promulgated an Open Door Policy which stipulated that all nations be given equal rights in China, that none be denied the privileges of commerce and navigation extended to any one country. Until the end of the 19th century, Britain had commanded the substantial portion of China's foreign trade, feeding the China market with cotton goods from Lancashire and yarn and opium from India. The United States share of this market was not insignificant, however. In 1868, 9.5 percent of China's exports went to the United States, and Sino-American trade constituted 5.2 percent of China's total trade. By 1905 trade turnover had reached $81 million annually. The years following enunciation of the Open Door Policy saw a progressive, but very gradual growth in the level of United StatesChina trade. In 1912 the United States was China's fourth largest trading partner, by 1919 the third, and by 1931 the United States had replaced Hong Kong as China's second largest trading partner, ac |