Case Overview, Permanent Normal Trade Relations with China

           Economists tell us that international trade is a good thing: economic activity expands in the countries that trade and markets become more efficient, helping consumers. Unfortunately, foreign trade also yields economic dislocations. As production of a manufactured good moves to factories in countries with lower costs, workers in that same industry in higher cost countries may lose their jobs.

          Free trade has long been a serious political issue in the United States, where wages are relatively high. Labor unions especially have fought initiatives in the Congress or at the White House aimed at opening up American markets in exchange for expanded access to markets overseas. While businesses that believe their goods can be successfully sold overseas to newly opened markets are strong advocates of free trade, businesses that fear foreign products would cut into their share of the market tend to side with the labor unions and oppose free trade. Hence, policymakers get lobbied on both sides on the issue.

           Permanent normal trade relations with a country means that when the United States reduces tariffs as a part of a trade agreement, that reduction applies to all with PNTR status. Without this status, tariffs on Chinese imports would be pegged at about 60 percent of the price of the goods. For many years proposals were put forth to give China normal trade relations. Approval had been handed out on a yearly basis, as American policymakers hoped the trading advantages of what was usually described as "most favored nation" status would act as leverage on China's authoritarian rulers. China's human rights record, in particular, disturbed Americans. Labor unions also drew attention to the lack of workers' rights in China. Businesses with strong interest in China began a major push in the 106th Congress. Companies like Boeing and Motorola, with markets already established in China, began working hard for passage of PNTR and strong business coalitions emerged to spearhead the fight. Many CEO's made themselves available to come to Washington to meet with legislators, and the lobbying offices of many major American corporations made PNTR their highest priority. One corporate lobbyist told us, "There are 18 people in this office; 16 of them are working on China." These companies were contested by the steelworkers, the autoworkers, the garment workers, and other unions concerned about what cheaper imports would do to the relevant labor markets in this country. In additional, environmental groups joined the fight to protest the environmental hazards caused by China's growing industrialization, and human rights organizations warned of the danger of losing leverage over China's treatment of religious and political dissidents.

          Although the opposition to PNTR in the Congress came from Democrats, the Clinton White House strongly backed the measure. With the Chinese economy growing rapidly as it continued to move toward a market economy, the potential opportunities for American business were not lost on the White House. Even though the trade imbalance with China-it exports far more to this country than it imports from the U.S.-is huge and would grow bigger in the immediate future, President Clinton believed that the long-term interest of the United States was in free trade with the Chinese.

          Abandoned by the White House, organized labor lost and PNTR was approved by the Congress. Not surprisingly, the amount of lower cost Chinese goods coming into the United States moved higher. American businesses expanded their presence in China as well, but in the short run America's trade imbalance with China increased.