APPENDIX 4

CHINA SANCTIONS: POSSIBLE ECONOMIC EFFECTS

Human rights abuses in China have evoked criticism from most Western governments and have led to calls in some countries for economic sanctions against China. The United States and other countries and multilateral institutions reacted to the June 3, 1989 massacre in Tiananmen Square almost immediately with statements of condemnation and, in some cases, with steps to impose economic sanctions against the Chinese government.1

This report describes sanctions that have been adopted by the Bush Administration and other Western governments and additional sanctions that have been proposed by Members of Congress. It discusses the extent of China's economic relations with the United States and others and analyzes the feasibility of imposing economie costs on China by curtailing or ending important aspects of those economic relations. Specifically it examines the effects of changes in: U.S. import policy, including most-favored-nation treatment and textiles imports; export credits and other financial assistance programs; export controls; military sales; and the policies of multilateral development banks.

The report analyzes the effects of both unilateral U.S. sanctions and multilateral sanctions in which other Western industrial countries participate. It attempts to determine who would bear the costs of the proposed sanctions and what the advantages and disadvantages of alternative U.S. sanctions would be. Analysis of several of the proposed sanctions export controls, arms sales, U.S. participation in multilateral development lending, and bilateral financial assistance Figgests strongly that the extent of costs imposed on China would depend heavily on the degree of multilateral cooperation. In other words, U.S. unilateral sanctions might simply divert commercial ties from the United States to other countries and impose only modest costs on China. Thus, the extent of multilateral cooperation, especially among the Western industrial countries, appears crucial.

U.S. SANCTIONS

In the aftermath of the June 3, 1989 massacre in Beijing, the Bush Administration took steps to signal its disapproval of the actions of the

'For a detailed discussion of the crisis in China and a continuing update on Administration and congressional action, see U.S. Library of Congress. Congressional Research Service. China in Crisis: Public Dissent and the Power to Struggle, by Kerry Dumbaugh. CRS Issue Brief 89100.

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Chinese government. On June 5, 1989, the Administration announced a ban on government-to-government sales and commercial exports of weapons and the suspension of high level military exchanges. On June 20, 1989, in response to "the wave of violence and reprisals by the Chinese authorities against those who have called for democracy," all participation in high level exchanges between government officials was suspended, including a visit by Secretary of Commerce Robert Mossbacher in July 1989. In addition, the Administration announced that it would seek to postpone consideration of loan applications by the People's Republic of China (PRC) to international development institutions.2

On June 21, 1989, the Chinese government began executing individuals accused of committing crimes during the pro-democracy demonstrations. In response, Secretary of State Baker announced that "we deeply regret the fact that executions have gone forward notwithstanding appeals from the U.S., the Federal Republic of Germany, and perhaps other states."3 However, Secretary Baker said that "the United States is not contemplating any additional sanctions at this time." The Bush Administration opposes congressional action to impose additional penalties on China and, in a June 26, 1989 speech at the Asia Society in New York, Secretary of State Baker warned that the "hasty dismantling of a constructive U.S.-Chinese relationship built up so carefully over two decades would serve neither our interests nor those of the Chinese people."

CONGRESSIONAL ACTION

For some observers, the Bush Administration's response has not gone far enough. Some Members of Congress have proposed legislation to curtail other aspects of U.S. commercial relations with China. The proposed legislation is aimed at important aspects of U.S. trade policy toward China, which, since the late 1970s, has facilitated a significant expansion of U.S. trade with, and investment in, China.

'Daily Report for Executives. Bush Imposes Sanctions on China, Halts Military, Civilian Arms Sales. June 6, 1989, p. A-18; Friedman, Thomas L. U.S. Suspends High-Level Links to China as Crackdown Goes On. New York Times. June 21, 1989. p. A1.

Daily Report for Executives. U.S. Opposes Loans to China; Baker Foresees No More Sanctions. June 22, 1989. p. A-15.

'Ibid.

"Department of State. Address by James A. Baker, III on "A New Pacific Partnership: Framework for the Future," June 26, 1989; Oberdorfer, Don. Baker Issues Warning on Sanctions. Washington Post. June 27, 1989. p. A18.

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On June 29, 1989, the House passed the International Cooperation Act (H.R. 2655, Foreign Aid Authorization for FY 1990 and FY 1991), to amend the Foreign Assistance Act of 1961. H.R. 2655 would impose a number of sanctions on China including the suspension of Overseas Private Investment Corporation (OPIC) and Trade and Development Program (TDP) activities with respect to China; the suspensions of: munitions export licenses, export of crime control and detection equipment, export of U.S. manufactured satellites, licenses for exports of nuclear equipment or fuels; and the suspension of any further liberalization by CoCom of export controls.

Similar legislation was passed in the Senate (S. 1160; State Department Authorization) on July 14, 1989. In addition to suspending OPIC, TDP, munitions licenses, crime control equipment exports, satellite exports, and nuclear cooperation, the Senate bill also urges, in a nonbinding "sense of the Senate," the postponement of Export-Import Bank financing for China, and recommends opposing the extension of loans by international financial institutions. The Senate also urged the President to review: the advisability of continuing to extend most-favored-nation treatment to China; all bilateral trade agreements between the United States and China; the bilateral commercial agreements governing Chinese-American cooperation on satellite launches; and the Chinese-American Agreement for Cooperation on the Peaceful Uses of Atomic Energy.

Additionally, numerous other bills have been introduced which would, among other things, curtail most-favored-nation (MFN) treatment for China (S. 1241, S. 1242, S. 1278, H.R. 2611, and S. 1151). Other proposed measures include:

suspension of all U.S. Government assistance to the PRC, including trade finance through the Export-Import Bank or loans, credits, credit guarantees;

suspension of Interior Department assistance to the PRC;

denial of GSP status for China, regardless of whether that country obtains entry to the GATT;

denial of export licenses for high-technology exports to the PRC;

directing the US representative to CoCom to vote against the export of any CoCom-controlled items by any CoCom-participating country to the PRC;

ban on the export of U.S. satellites for launch by China;

ban on U.S.-China science and technology cooperation.

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RESPONSE OF OTHER GOVERNMENTS

Immediately after the June 3 military attack on demonstrators in Beijing, many Western governments strongly denounced Chinese government actions, but most declined to impose economic sanctions. West German Chancellor Helmut Kohl, for example, characterized the Chinese government's actions as a "barbaric use of brutal force." His foreign minister Hans-Dietrich Genscher, however, rejected the use of economic sanctions, asserting that such action would only hurt the Chinese people. Japanese Prime Minister Sosuke Uno called the Chinese government's actions regrettable, but suggested that the Japanese Government should maintain political and economic relations with China in order to influence events there."

With the continuation of reprisals in China, several Western governments and multilateral institutions acted, albeit in some cases reluctantly, to interrupt some aspects of their economic ties to China. The Japanese Government announced that it would suspend 14 current development aid missions and a $5.5 billion aid program that had been scheduled to begin in April 1990. At first, Japanese spokesmen said that the government had acted because of the "physical incapacity to implement those things... But not as a matter of policy."9 Japanese officials also expressed concern over U.S. sanctions and rhetoric that some regarded as overly harsh. More recently, however, Japan has taken a harder line in condemning actions by the Chinese government and suggested that other conditions beyond "physical capacity," might be necessary before it resumed its aid program.

Several European countries also instituted modest sanctions. The United Kingdom suspended sales of military hardware and technology to China, but ruled out further sanctions out of fear of causing "great panic" in Hong Kong. Italy halted grants and loans. Belgium froze government loans and halted financing for development projects. At the June 26-27 summit meeting of European Community heads of State, the European Council announced several measures, including: an interruption by Member States of military cooperation and an embargo on trade in arms with China; postponement of new cooperation projects; and a reduction of programs of cultural, scientific and technical cooperation. The European Council also advocated the postponement

"German Information Center, The Week in Germany, June 9, 1989, p. 1. "The Economist, July 1, 1989, p. 27.

Financial Times. Japan Suspends $5.5bn Aid Package to China. June 21, 1989, p. 1.

"Kyodo, "Spokesman cited on 'Subdued' Response," June 9, 1989. Cited in FBIS, Northeast Asia Issue, June 12, 1989, p. 1.