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Tighter Trade Could Earn China's Backlash

US may target military-aligned industries

BEIJING is bracing to strike back if the United States conditionally extends low-tariff trade privileges, as it appears likely to do.

Amid the Clinton administration's struggle to fashion a slap that will stun China for human rights abuses but not hurt bilateral trade, Chinese and Asian analysts predict China will retaliate if Washington opts for selective sanctions.

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Last year, President Clinton pegged extension of China's most-favored-nation (MFN) trading status to human rights improvements, which Beijing has failed to deliver, human rights advocates and Western diplomats say.

Now, Chinese defiance in the form of a recent crackdown on political dissidents has cornered the US president. Mr. Clinton has been urged by a growing number of congressmen and government officials not to withdraw China's MFN status entirely, because that would hurt the more than $9 billion in US exports and would also affect US competitiveness in China's fast-growing market. The president's decision must be made by June 3.

But punishing China selectively with a proposed banning of military-produced goods, or raising tariffs on exports from state-run enterprises, will be tricky to enforce and likely will provoke a Chinese backlash, analysts say.

``Chinese retaliation will be commensurate with the damage to their economy,'' an Asian diplomat in Beijing predicts. China could possibly target vulnerable US industries such as aircraft producers, industrial equipment, telecommunications companies, other high-technology companies, and wheat farmers.

Singling out goods produced by China's Army would be difficult because military enterprises often operate in a web of front companies and joint ventures. Although the military would be a satisfying target in the wake of its 1989 pro-democracy crackdown, its network of businesses - involved in textiles, aviation, and hotels - would be tough to monitor, Western observers say.

``The Chinese military oversees a labyrinth of companies.... I don't think anyone knows how it has been structured or where the money goes,'' commented a Western military analyst, who says it is difficult to estimate how much of the $30 billion in Chinese exports to the US is produced by military-run companies.

Targeting state-run enterprises would be harsher, say Western analysts, who estimate that these companies account for three-quarters of exports to the US. But these kinds of sanctions would be problematic due to the ambiguous nature of state-run companies. China has 15,000 state-owned enterprises, more than one-quarter of which are allowed to be involved in overseas trade. But defining which companies are state-run is no longer clear-cut; many label themselves state-run to get tax breaks, while others are partially owned by shareholders and are listed in stock markets abroad.

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Although selective sanctions are aimed at exempting private and collective enterprises from the damage of sanctions, different kinds of enterprises often cooperate with, and buy from, each other. Penalizing one enterprise would set off a larger ripple effect through the Chinese economy, Chinese analysts say.

Targeted trade restrictions also would resound through fast-growing coastal provinces in southern China that have been the engine in China's drive to become a market economy. Labor-intensive industries such as toys and textiles could be hurt heavily, affecting the jobs of thousands of Chinese, foreign investment in the region, and China's social stability, Chinese and Asian observers say. ``This decision could create chaos in Chinese trade far beyond what Washington originally intended,'' an Asian diplomat says. ``China could not ignore that.''

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