(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00553R000200130003-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: January 12, 2017
• Document Release Date: June 30, 2011
• Sequence Number: 3
• Publication Date: June 1, 1983
• Content Type: REPORT

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China-United States:
Interdependence
Growing Economic
Political Implications of
EA 83-10107
June 1983
Copy 2 0 8
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Intelligence
China-United States:
Political Implications of
Growing Economic
Interdependence
This paper was prepared by I (China
Division, in cooperation with the Systems
Development Staff, Office of East Asian Analysis.
It was coordinated with the National Intelligence
Council.
OEA
Comments and queries are welcome and may be
directed to the Chief, Development Issues Branch,
Secret
EA 83-10107
June 1983
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Secret
China-United States:
Political Implications of
Growing Economic
Interdependence
Key Judgments China's foreign policy has long been a complicated brew of realpolitik,
Information available xenophobic nationalism, and economic calculation. Security considerations
as of 15 June 1983 have been the primary force shaping China's foreign policy, but there have
was used in this report.
been periods, such as the early 1950s, when the PRC's need for economic
ties abroad have been an influential factor.-The bitter experience with the
Soviet Union, however, convinced the Chinese that they must avoid
becoming economically reliant on any one country and accounts for
Beijing's current efforts to spread its trade and investment relations over a
broad range of Western countries.
We believe the importance of economic factors in China's foreign policy is
likely to increase substantially over the coming decade as trade, foreign
investment, and other commercial relationships with the outside world
expand. Some of these arrangements would be vulnerable if Beijing's
domestic politics shift radically in a post-Deng era. New economic
challenges, however, are emerging that should make commercial dealings
with the West more imperative for the Chinese-particularly for export
markets, as a source of advanced technology, and for assistance in energy
development.
The Chinese may need Western help more than they currently anticipate.
Beijing expects that its economy will grow during the latter half of the
1980s at a rate approximating the 1952-77 average of 5.7 percent, but our
calculations suggest that overall growth will have difficulty reaching 5
percent. We believe China's energy shortage will become more acute with
oil production starting to decline by 1985. Moreover, the Chinese seem to
be overestimating their ability to conserve energy in the future.
As these constraints become increasingly evident to Chinese economic 25X1
planners over the next two to three years, it will reinforce the leadership's
decision for Western companies to be deeply involved in energy develop-
ment, particularly offshore oil.' US firms, which are world leaders in
offshore drilling as well as surface mining, would be in a strong position to
broaden their involvement in China. 25X1
' This paper proceeds on the assumption that US companies will be significant participants
in a commercially viable offshore oil program. ARCO has already begun exploration in the
South China Sea, and US companies are participants in all consortiums still bidding on
blocks.
Secret
EA 83-10107
June 1983
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Over the next decade China's economy also will become more dependent
on foreign trade. The Chinese recognize that without substantial industrial
and infrastructure imports, capital productivity will continue to stagnate,
retarding overall development. We believe that China is counting heavily
on the US market and that the US share of Chinese exports may well dou-
ble over the next decade. On the import side, the Chinese will be
particularly in need of transportation, electronics, mining technologies, and
grain from the United States.
These economic stakes will work to reinforce moderation in Beijing's
political dealings with the United States. Beijing will be increasingly
sensitive to the possibility that its growing commercial equities with the
United States could be jeopardized by a major imbroglio over US links
with Taiwan. Specifically, we believe China will be less likely to exert
heavy pressure on the United States to reduce its arms sales to Taiwan as
long as these transfers avoid clear violation of the "quantity and quality"
provisions of the 17 August 1982 communique. Such moderation will be
particularly evident during the latter half of the 1980s, when Chinese
dependence on US oil technology will peak.
Nevertheless, in our view, there will be definite limits to US economic
influence. For many influential Chinese, Taiwan's divided status remains
an emotional issue, symbolizing their country's continuing subservience to
Western power. If the Chinese perceive an unambiguous trend toward
strengthened US defense or political ties with Taipei, they may well force a
general retrogression in Sino-US relations and sacrifice important elements
of their economic and technological ties. In a worst case scenario, we
believe the Chinese have sufficient commercial options through Western
Europe, Japan, and the USSR to enable their economy to weather a major
reduction in US oil-production assistance and trade.
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China's Increasing Interdependence
China's Energy Bind-A Force for Interdependence 2
Foreign Trade: Pressures for Expansion 5
... and Technologies/ Food Grains 6
Political Implications of Growing Economic Interdependence 6
A. China Exports: International Trade and Market Shares, 1981 11
B. China Imports: International Trade and Market Shares, 1981 13
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3ecrei
China-United States:
Political Implications of
Growing Economic
Interdependence F-1
Over the past decade China's economic interdepend-
ence with the world has reached unprecedented pro-
portions. Foreign trade, primarily with the non-Com-
munist world, has become more important to the
country's economic growth than at any previous time
in its history. In the early 1970s export earnings
constituted only 3 percent of Gross Domestic Product
(GDP), but within the decade this figure has more
than doubled to nearly 7 percent. Western 2 technol-
ogy and know-how have become key to China's
development. Despite the economic retrenchment of
the past three years, advanced technology imports by
value now stand at more than 10 times their 1970
level. The number of officially sponsored Chinese
scholars sent to study abroad have gone from a mere
with any other country. Close to 100 Chinese delega-
tions, mostly scientific and technological, visit the
United States every month, while officially sponsored
students currently studying in the United States
number over 5,000.3
China's Commitment to Its Present Course
China's economic opening to the West is driven by
political as well as developmental considerations. The
long-term threat from the Soviet Union remains a
compelling reason for China to have the Western
democracies participate in its economic development.
Domestically, China's reform-minded leadership has
built much of its political power base on a repudiation
of the xenophobia fostered by Cultural Revolution
radicals and on promises of a genuine economic
takeoff by the 1990s.
handful a decade ago to some 8,000.
During the past four years, Beijing has turned to
foreign investment-historically a symbol of exploita-
tion-to increase its access to both technology and
capital. So far over $1 billion has been invested in
China by foreign firms. Perhaps most significantly,
China is poised to conclude a number of long-term
joint ventures with foreign energy companies that
could result in undertakings valued in the tens of
billions of dollars.
The United States has played an important role in
China's economic development-as a source of ad-
vanced technology, agricultural products, and foreign
exchange earnings. US-Chinese trade has risen from
near zero in 1971 to $5 billion in 1982. Overall, the
United States now ranks second as a source of imports
and third as a market for China. A substantial
amount of US-origin high technology has been ac-
quired by the Chinese over the past several years,
most prominently computers and aircraft. Beijing's
scientific and technological exchange program with
the United States is substantially larger than that
We believe that China's economic interdependence
with the West is likely to grow under Deng Xiaoping's
political tutelage. Indeed, there are signs over the past
year that the leadership consensus for the economic
opening to the West is strengthening:
? China's recently released, long-term economic goals
are predicated on a heavy infusion of foreign capital
and technology.
? Media articles allegorically sniping at foreign in-
volvement in China's modernization have dimin-
ished markedly over the past year.
? In recent months Beijing has introduced a major
liberalization of its economic regulations, facilitat-
ing investment by foreigners and providing larger
financial incentives.
Although these trends are encouraging, a post-Deng
leadership may not be as favorably disposed toward
such substantial foreign involvement.
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Figure 1
China and Japan: Comparative Energy Savings
1
60 1970
75
83b 85
80
a"Economic activity" for Japan is GNP, and for
China is industrial and agricultural output.
b 1983-95 is projected.
some influential Chinese remain
deeply troubled by what they regard as China's
excessive dependence on the West and the negative
cultural byproducts that have accompanied commer-
cial ties. Deng's chosen successors, Hu Yaobang and
Zhao Ziyang, will lack their mentor's broad power
base and could find themselves having to make some
concessions to these critics. A worst case scenario
might envisage the Chinese leadership becoming in-
creasingly xenophobic, yielding to an instinct that is a
familiar part of the country's history.
We believe, however, that the 1980s and 1990s will
pose major economic challenges for China and sub-
stantially lessen the likelihood of Beijing turning
inward again. A continuing problem with energy
supplies-despite new production in the South China
Sea-and the country's increasing need for foreign
trade to help underwrite economic growth should push
Beijing toward greater economic interdependence
with the West.
1974
2.5
4.1
1975
-5.4
1.2
1976
0.0
-0.8
1977
-5.2
-1.7
1978
-2.2
-2.0
1979
-1.1
-5.4
1980
-5.3
-9.1
1981
-5.5
-5.4
1982
-5.9
-1.2
China's Energy Bind-
A Force for Interdependence
China's most difficult economic problem during the
next decade will be a continuing slowdown in the
growth of domestic energy supplies. For several years
insufficient energy output has been an important
constraint on industrial production. Energy shortages
will probably continue, particularly if heavy-industry
growth rates continue to exceed plan targets
Energy output is now growing at about 4 percent per
year, almost all from coal. The outlook for other fuels
is bleak-natural gas production has already fallen
about 20 percent below its peak in 1979, and the
critical oil sector is struggling to maintain production
at its current level of 2 million b/d. We expect that
China will face a decline in oil output by 1985. Recent
studies by the World Bank conclude that China could
become a net oil importer as early as 1985.
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Secret
Over the past five years the Chinese have begun to
appreciate more fully their energy squeeze and the
difficulties of boosting domestic production. They
have turned increasingly to the West for technology to
spur development of energy supplies, while emphasiz-
ing more stringent conservation practices at home.
Since 1980 Beijing has allocated increased investment
funds and designed new incentive programs to pro-
mote energy savings. We believe the Chinese are
aiming at a conservation rate that averages between
3.5 and 4 percent per year over the next decade. The
World Bank projects that China's long-run rate of
energy conservation is, however, unlikely to exceed
2 percent annually, while a recent forecast by Whar-
ton Econometric Forecasting Associates concludes
that annual gains in energy efficiency are likely to be
in the 2.5- to 3-percent range for the rest of the
century.
Indeed, recent Chinese data indicate that the rate of
energy savings is already slowing (see figure 1).' Early,
relatively easy gains in efficiency wrung from China's
outmoded industrial base must now be achieved
through the costly acquisition of energy-efficient
plants. Indeed, to sustain an average annual savings of
3 percent through the 1990s-about the rate achieved
by the technologically advanced and more investment-
oriented Japanese economy since 1973-would proba-
bly require more sustained purchases of capital equip-
ment than are now planned.
Even allowing a generous 3-percent-energy-savings
rate, however, the Chinese may be surprised by the
constraint that energy places on economic activity
during the next decade. Assuming that China is able
to achieve the ambitious energy-production targets
published in its media, our calculations suggest that
the economy will be hard pressed to exceed a 4.4-
percent average rate of agricultural and industrial
increase through the mid-1990s (see figure 2, "Base-
line Energy Scenario"). This rate is well short of
Beijing's growth targets for the period and inconsider-
ably below the average annual growth of 5.7 percent,
which China achieved between 1952 and 1977.5F_
' This is in part a result of the upswing in the energy-intensive
heavy-industry sector. Q
' Subject to hard currency requirements, China could generate
more growth by eliminating oil exports and importing more oil.
In completing these calculations, we assumed that
agriculture would grow at 4 percent per year-the
target for the Sixth Five-Year Plan-through 1990.
This estimate is about I percentage point above the
historical growth path for agriculture. We also as-
sume that light industry grows at 5 percent annually
through 1995, again extending the Sixth Plan target.
Energy demand in the residential-commercial sector
is assumed to grow 4 percent annually, reflecting the
increases in real disposable income available to the
Chinese. Variations of I percentage point up or down
in these assumptions did not materially modify our
results. Changes outside of this range produced im-
balances in sector performance that would ultimately
constrain economic growth.
We have also constructed high and low scenarios in
the event that energy output varies from the plan over
the decade. In the high scenario, should the Chinese
surpass the energy-production targets by 15 percent,
they could add about half a percentage point to their
average rate of economic growth between 1983 and
1995, bringing it up to 5 percent. In the low scenario,
a substantial shortfall of 25 percent in expected
energy production-brought on, for example, by a
slowdown in the acquisition of hydroelectric power
plants, problems in developing new coal mines, and
lower production from the offshore oil program-
would cut the rate of economic growth by about 1
percentage point annually over the period. This would
bring it down to about 3.5 percent. To match China's
historical growth rate would require a combination of
high energy growth and efficiencies that we consider
unlikely.
Enhanced Role for Western Firms
As they come to recognize the full seriousness of the
energy bind, the Chinese will be reinforced in their
decision to have Western companies deeply involved
in energy development. Beijing may rely more heavily
on foreign equipment, technology, and investment to
develop its coal sector, where production can be
boosted within a relatively short time. An acceleration
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Figure 2
China: Economic Performance Under Energy-
Production Alternatives
600 1980
83a 85
I 1 J
90
of the coal program would require additional large
amounts of investment, which could only come from
foreign partners. Increasing petroleum production
would be a longer term proposition, but the Chinese
may try to speed up offshore development timetables
and expand the number of blocks in which foreign
firms are operating. It may also launch a more
ambitious program for secondary and tertiary recov-
ery at onshore fields.
US firms, which are world leaders in the petroleum
industry as well as in surface coal mining, stand to
benefit most by China's urgent needs. Beijing has long
been attracted to US oil firms, not only because of
their strong position as a supplier of technology, but
more importantly because of their unrivaled manage-
rial and engineering experience with offshore oil
projects. These assets will almost certainly win US oil
majors a significant portion of the South China Sea
blocks now in bidding.
Although Beijing looks very favorably on US petro-
leum companies, five or six major non-US companies
will also play a long-term role in China's offshore
High-energy
scenario
Baseline-energy
scenario
Low-energy
scenario
Annual growth rates,
1983-95
Percent
High 5.0
Baseline 4.4
Low 3.4
programs as China seeks to diversify its dependency.
British, French, and Japanese firms have already
signed contracts, and Royal Dutch Shell also has
sufficient technology and know-how to be highly
competitive in offshore development work. Neverthe-
less, their management and engineering experience is
more limited than that of the US companies, and the
non-US companies may well encounter some techni-
cal difficulty operating in deepwater areas. Such
shortcomings might be offset, however, by subcon-
tracting specialized operations to US exploration com-
panies or their foreign subsidiaries.
In nonpetroleum energy projects, such as coal, gas,
and nuclear and hydroelectric power, the Chinese will
also retain a diversity of foreign partners. Although
US firms have an advantage in surface-mining tech-
nologies and possibly nuclear power, the Europeans
and Japanese are at least equal in underground
mining and hydroelectricity. The Soviets are also
capable of assisting the Chinese in hydroelectric
development.
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Figure 3
China: Plans for Primary Energy
1982
Actual
Percent
1995
Projected
Percent
- Onshore oil
12.2
- Offshore oil
5.1
Natural gas
0.2
Natural gas
3.2
Primary electricity
4.1
Coal
65.0
Note: This figure illustrates China's plans to shift its
composition of energy supply (shown in metric tons of
coal equivalent) over the next 12 years. Beijing is count-
ing heavily on offshore petroleum production to help it
through its energy bind, but our calculations suggest
that supplies will constrain economic growth in any case.
Foreign Trade: Pressures for Expansion
Over the next decade China plans to place more
emphasis on foreign trade in its efforts to increase the
pace of overall growth. Authoritative Chinese officials
predict that in this period trade will expand twice as
fast as domestic production.' The Chinese recognize
that expanded equipment imports from the West are
key to their ability to compete with quality products
in the international marketplace while conserving
energy and raw materials.
as much as 50 to 60 percent
of the country's plant is highly inefficient by Western
6 Countries with large populations and geographic size tend to have
lower foreign trade ratios (exports plus imports divided by GNP)
than smaller countries. Thus, China, like the United States and
USSR, will never be as dependent on foreign trade as South Korea,
standards. The World Bank calculates that productiv-
ity has stagnated since 1957. Its studies show that
between 1957 and 1979 industrial output growth has
been achieved almost entirely by increasing the quan-
tities of labor and capital employed rather than by
improving the quality of inputs or the efficiency with
which they are being used. In this regard, China's
performance is far worse than the 1952-57 period 25X1
when capital and labor productivity rose substantially.
China's plans call for its large-scale import program 25X1
to be financed over the next decade primarily out of 25X1
export earnings. Statements by Chinese officials im-
ply that they expect exports to rise as a share of GDP
from 6 percent to approximately 9 percent. Without
expanded earnings, China would be forced to go into
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heavy debt-an option still anathema to China's
leadership-or be prepared to accept a more modest
import program that would retard overall economic
growth.
Increasing problems of providing employment within
China, possibly of unprecedented proportions, will be
an additional pressure on Beijing to expand export
industries. According to Chinese demographers, the
number of people reaching working age over the next
decade will average more than 3 million annually in
the urban areas and some 20 million per year in the
countryside. It is doubtful that these new workers can
be absorbed by China's virtually fixed agricultural
base, and Beijing is investing more heavily in export-
oriented industries to bring some relief.
China Looks to the United States for Markets ...
These pressures will impel China increasingly to
cultivate the West, particularly the United States, as
a source of export earnings. The United States now
stands as China's third-largest export market, ac-
counting for 10 percent of its total foreign exchange
earnings, and China still considers the United States
to have a large, relatively untapped appetite for
Chinese goods. The complementarity of the US and
Chinese economies suggests that China might be able
to obtain as large a share of the US market as its
present share of the world market, and maybe more.'
China today accounts for 1.4 percent of world ex-
ports-nearly double its 0.8-percent share of the US
market (see appendix A). We would expect stronger
Chinese sales to the United States of light industrial
goods, consumer electronics, machine tools, finished
wood products, and textiles.
Despite this growth, China is not likely to become
heavily dependent on any particular export market.
Beijing will continue to trade substantially with
Japan, Hong Kong, and Western Europe. Moreover,
recent trends suggest that China's trade is becoming
more diversified in the direction of the Soviet Union
and Eastern Europe. Declines in trade between China
and the USSR and Eastern Europe over the past two
decades leave much potential for Chinese sales of
' Beijing is well aware of the experience of a number of smaller
Asian economies, which achieved their economic takeoff through
exporting, largely to the United States.
light industrial goods, including textiles and hard
wares. Exports to the debt-ridden LDCs probably will
grow the least over the next decade.
... and Technologies/Food Grains
On the import side, by 1990 US sales can be expected
to be running two to three times the present level of
some $3 billion per year. This is a conservative
estimate, based on the assumption that China only
partially achieves its trade expansion goals and that
the United States simply retains its current 20-
percent share of the market. Given Chinese develop-
ment priorities, American equipment and technologies
in the transportation, mining, electronics, and energy
sectors will be highly attractive. In addition, over the
long term, China probably will have to increase grain
imports as it grapples with the problem of trying to
feed a growing population that now exceeds 1 billion
people on 100 million hectares of arable land.' Higher
incomes in China will add to the problem by raising
the demand for meat, which requires large amounts of
grain to produce. We believe, however, that the
United States is unlikely to retain its current 60-
percent share of the Chinese market as other grain-
exporting countries expand production. The United
States, however, will remain the largest single suppli-
er, providing a larger share if Chinese harvests suffer
severe shortfalls.
Political Implications of
Growing Economic Interdependence
China's foreign policy has long been a complicated
brew of realpolitik, xenophobic nationalism, and eco-
nomic calculation. In the post-1949 era these forces
have vied with one another, sometimes sharply, as
China struggled to chart its course in the world.
Security considerations have been the primary force
shaping China's post-1949 foreign policy, but there
have been periods when China's need for economic
ties abroad has been an influential factor.
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~ecrvL
Moscow's substantial economic assistance to China
during the 1950s was clearly an important stimulus
for Beijing's concessions to the USSR on a number of
fundamental political issues. By any accounting, the
1950 Sino-Soviet Friendship Treaty was a bad politi-
cal deal for the Chinese. After two months of hard
bargaining, China:
? Recognized Outer Mongolia's continued "independ-
ent status," which constituted tacit acceptance of
Soviet control of territory that the Chinese believed
was theirs.
? Agreed not to change the status of Dalian, which
the Soviets were then occupying as a naval base. F-
The Chinese occasionally hint that there is a direct
link in the leadership's thinking between their own
moderation on bilateral political issues and economic
gain from the United States. In a recent conversation
with senior US officials, Ambassador Zhang Wenjin
strongly implied that China would not push Taiwan-
related matters if the United States were more gener-
ous in authorizing technology sales
During the past year the Chinese have underscored 25X1
the value they attach to the US economic relations by
taking pains to insulate them, for the most part, from
the political differences that have beleaguered bilater- 25X1
al political relations. Senior Chinese officials, includ-
ing Deng, have emphasized their intention not to
allow these tensions to jeopardize overall trade and
investment. In fact, the Chinese recently committed
themselves to two large-scale, long-term joint ventures
with US firms.
Economic Leverage and the Taiwan Issue
The importance to Beijing of continued access to US
technological assistance and markets is likely to build
over the next several years-reaching a high mark
during the late 1980s. At that time China's energy
shortage will have grown more acute, and US oil
firms will be starting to move from exploration to the
crucial developmental phase. The large amount of
funds required for development will cause China to
depend heavily on the international financial markets
in which the United States plays a strong role. If
Sino-US political relations were to veer off course
before 1985, it would be easier for the Chinese to pull
back from involvement without sustaining inordinate
losses of time. After 1990, China may be better
positioned to move ahead independently of US compa-
nies as it gains experience with offshore development.
The Soviets. subsequently delayed withdrawal from
Manchuria and Lushun-both of which were to be
vacated on dates established in the Treaty. Later,
after having urged the Chinese into the Korean
conflict, Moscow reneged on promises of compensa-
tion for war expenditures. Nevertheless, as Chinese
officials would later recall, China endured these
affronts, in large part because they feared the loss of
Soviet economic assistance.
As the 1950s unfolded, Moscow's use of its economic
ties to extract political and economic gains from
China took its toll, ultimately helping precipitate a
total break. This bitter experience convinced the
Chinese that they must avoid becoming economically
reliant on any one country again. Further, it explains
Beijing's efforts to spread its trade and investment
relations-as seen by its opening to the West in the
1970s-over a broad range of countries.
Despite this concern, there is some evidence that, as
development has become a higher priority for the
Chinese leadership in recent years, economic consid-
erations have played an increasingly influential role in
China's foreign policy. Expectations of a major expan-
sion of Sino-US economic ties seem to have been an
important element in the Chinese decision to drop its
precondition for a termination of US arms sales to
Taiwan and to move ahead with the establishment of
full diplomatic relations in 1979. During the year
prior to normalization, senior American officials
painted a promising picture of liberalized trade and
technology flows that would follow diplomatic recog-
nition.
The key question is how US economic leverage will
influence Beijing's treatment of bilateral political
irritants, especially the US-Taiwan relationship. Al-
though China's assessment of the United States as a
strategic counterweight to the Soviets will remain
paramount in shaping Beijing's policy, we believe its
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growing economic interdependence with the United
States will help to moderate Beijing's reaction to what
it sees as adverse developments in US-Taiwan ties.
The Chinese appreciate the separation of private
enterprise and government in the United States, but
they almost certainly will worry that a major falling
out may cause Washington to actively discourage US
companies from making additional commitments for
offshore operations or take steps to retard the transfer
of petroleum-related technologies. Unsettled US-Chi-
na relations could, in any case, cause US oil firms and
bankers to be less willing to risk committing them-
selves to long-term projects with Beijing. Moreover,
the coming decade will be a period when China's
foreign trade with the United States is of greater
importance to China's economy than it is now, adding
pressure on Beijing to try to ensure that its exports
and imports are not constrained by a serious dispute
over Taiwan.
The Chinese also will want to avoid a highly charged
Sino-US political atmosphere, fearing that this could
in time adversely affect trade and investment, ties with
Japan-a country that has traditionally followed the
American lead. Japan would almost certainly be more
wary of extending large concessionary loans if rela-
tions between Washington and Beijing appeared to be
heading for a sharp decline. Such a turn of events
could also complicate Chinese efforts to acquire ad-
vanced technology from Tokyo and cause private
industry in the United States and Japan to become
more wary about making long-term investments.
We believe these new economic pressures on Beijing
will help shape a more tolerant attitude toward US
arms sales to Taiwan. Given the ambiguities of the
17 August 1982 communique, during the latter half of
the 1980s China will have a greater incentive to take a
flexible view of these sales as long as they do not
clearly violate the "quantity and quality" provisions
of the communique. In interpreting the "gray areas"
of the agreement, the Chinese may be more receptive
to US accounting of quantitative trends as well as our
judgment as to what constitutes a qualitative improve-
ment of arms. Moreover, in reacting to individual
political initiatives that appear to favor Taipei, Bei-
jing may be more predisposed toward pro forma
responses and extremely cautious about boxing itself
into hardline positions.
The Limits of US Economic Influence
Even in the late 1980s, however, US economic influ-
ence in China will have definite limits. China's his-
torical sensitivity to infringements of its sovereignty,
reinforced by its negative encounter with the Soviet
Union in the 1950s, has left a deep and lasting scar.
Many influential Chinese, despite their ostensibly
pro-Western outlook and their enthusiasm for stron-
ger economic and technological ties with the United
States, continue to harbor a deep resentment of
China's humiliating partition by the West during the
past century. For them, Taiwan's status symbolizes
their country's continuing subservience to Western
power and denies China its respect as a great nation.
Hence, for much of the past three decades, one of
Beijing's major foreign policy objectives has been the
military and political isolation of the Government of
Taiwan. During the 1950s this aim lay behind two
major military crises in the Taiwan Straits and since
1970 has been a central issue in every major set of
political negotiations between China and the United
States. China's relations with Japan, Europe, and the
Third World have also been dependent on their tacit
agreement not to strengthen official ties with Taiwan.
In Beijing's view, the progress that has been made
toward reunification has been hard won, and it would
regard an unambiguous trend toward stronger US-
Taiwan defense or political ties as a fundamental
threat to the gains for which it has worked so long. In
this situation, we believe the Chinese would be pre-
pared to force a general retrogression in Sino-US
relations and to sacrifice some important elements of
their economic and technological ties.
Viable Commercial Alternatives to the United States
Although Beijing's economic links with the United
States will be highly valued, particularly during the
latter half of this decade, China would have viable
commercial options if a major rupture of its commer-
cial relations with the United States were to occur.
The Chinese could proceed with their offshore oil
exploration and development program by utilizing
non-US companies, principally European. Once devel-
opment is under way, a switch away from US firms
25X1
25X1
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would be a time-consuming and expensive undertak-
ing that could result in China's having to cut back the
scope of its offshore program. Beijing's greatest chal-
lenge would be to locate non-US companies willing to
invest large amounts of capital and to pick up where
the US companies left off. Much would depend on
prospects at the time for oil recovery in the US blocks.
In a seriously deteriorating political situation, China
could also weather a sharp reduction in trade with the
United States. The Chinese appreciate that, short of a
state of war, the US Government would be unlikely to
impose anything resembling a cutoff in bilateral
trade. More realistically, a US administration could
withdraw trade preferences, such as most-favored-
nation treatment, which is extended annually to Chi-
na. It could also use its discretionary authority to
curtail the importation of textiles and other high-
volume Chinese exports. At most, we estimate such
actions would cut China's foreign exchange earnings
by 5 to 10 percent-enough to significantly constrain
development plans but not cripple the economy. A
portion of this loss could be offset by short-term
borrowing, and the Soviet Union might take up some
of the slack in China's exports as a political gesture.
The imposition of US restrictions on technology and
grain exports would no doubt put a crimp in China's
development program, but would not be an insuper-
able obstacle. In a number of industrial and military
projects requiring advanced computer and electronic
technology, the Chinese may well have to settle for
less than state-of-the-art equipment. A cutoff of
advanced technology from the United States would
also inhibit China's efforts to learn how to replicate
those embargoed items. On the other hand, over the
next decade the Chinese will develop a much stronger
capability to acquire advanced technology through
illegal means, and strict enforcement of COCOM
regulations is a problem that will probably become
increasingly difficult. China's sources of grain will
remain diversified, and, at worst, it could end up
having to pay higher prices from other suppliers such
as Canada, Australia, and Argentina
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Appendix A
China Exports: International Trade and Market Shares, 1981
Total
US
Total
US
World
Market
US
Market
PRC
Exports
World
Exports
Total commodities
21.59
2.06
1,521.68
266.44
1.4
0.8
9.5
17.5
Industry
18.84
1.77
1,431.31
258.65
1.3
0.7
9.4
18.1
Metallurgical
0.89
0.10
111.05
22.57
0.8
0.5
11.7
20.3
Power
0.00
0.00
2.22
0.00
0.0
0.0
0.0
0.0
Coal and Coke
0.27
0.00
16.84
0.14
1.6
0.0
0.0
0.8
Petroleum
4.57
0.32
371.78
84.12
1.2
0.4
7.0
22.6
Chemical
1.28
0.15
140.34
14.34
0.9
1.1
12.1
10.3
Machine building
1.49
0.09
493.76
82.10
0.3
0.1
6.4
16.6
Building materials
0.24
0.01
16.97
1.66
1.4
0.4
2.9
9.8
Forest
0.60
0.03
31.71
4.98
1.9
0.6
5.0
15.7
Food
2.40
0.08
89.26
15.41
2.7
0.5
3.5
17.3
Textile
2.76
0.19
37.31
2.74
7.4
6.8
6.7
7.4
Clothing
2.01
0.45
31.60
8.01
6.4
5.7
22.6
25.3
Leather
0.52
0.06
17.22
4.79
3.0
1.3
11.8
27.8
Papermaking
0.86
0.12
71.24
15.36
1.2
0.8
14.0
21.6
Other
0.97
0.15
19.15
2.33
5.0
6.4
15.4
12.2
Agriculture
2.75
0.29
90.37
7.79
3.0
3.7
10.5
8.6
Livestock
0.37
0.00
4.35
0.34
8.5
0.0
0.0
7.8
Fishing
0.39
0.02
10.74
2.73
3.7
0.8
5.6
25.4
Food crops
0.46
0.00
45.53
1.88
1.0
0.2
0.9
4.1
Industrial crops
1.06
0.21
23.83
2.06
4.4
10.4
20.1
8.6
Crude byproducts
0.47
0.05
5.93
0.79
7.9
6.2
10.5
13.3
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Appendix B
China Imports: International Trade and Market Shares, 1981
Total
US
Total
US
World
Market
US
Market
PRC
Imports
World
Imports
Total commodities
17.84
3.59
1,521.68
220.90
1.2
1.6
20.1
14.5
Industry
13.61
1.66
1,431.31
188.04
1.0
0.9
12.2
13.1
Metallurgical
1.61
0.02
111.05
8.36
1.5
0.2
1.1
7.5
Power
0.02
0.00
2.22
0.00
0.8
0.0
0.0
0.0
Coal and coke
0.10
0.00
16.84
6.01
0.6
0.0
2.9
35.7
Petroleum
0.05
0.00
371.78
4.24
0.0
0.0
0.0
1.1
Chemical
2.21
0.42
140.34
27.91
1.6
1.5
18.9
19.9
Machine building
5.43
0.29
493.76
108.18
1.1
0.3
5.3
21.9
Building materials
0.16
0.00
16.97
2.00
0.9
0.0
0.0
11.8
Forest
0.19
0.10
31.71
3.77
0.6
2.7
53.8
11.9
Food
0.75
0.02
89.26
8.35
0.8
0.3
0.0
9.4
Textiles
2.30
0.61
37.31
4.18
6.2
14.6
26.6
11.2
Clothing
0.04
0.00
31.60
1.13
0.1
0.0
0.0
3.6
Leather
0.13
0.06
17.22
0.73
0.8
8.7
47.8
4.3
Papermaking
0.51
0.13
71.24
9.50
0.7
1.4
26.5
13.3
Other
0.10
0.00
19.15
3.67
0.5
0.0
1.0
19.2
Agriculture
4.23
1.93
90.37
32.86
4.7
5.9
45.5
36.4
Livestock
0.00
0.00
4.35
0.27
0.0
0.0
0.0
6.2
Fishing
0.00
0.00
10.74
1.02
0.0
-
0.0
0.0
9.5
Food crops
2.39
1.33
45.53
20.36
5.2
6.5
55.8
44.7
Industrial crops
1.73
0.59
23.83
10.70
7.3
5.5
34.4
44.9
Crude byproducts
0.11
0.00
5.93
0.50
1.9
0.0
0.0
8.5
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