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Case Studies in Sanctions and Terrorism: China

Case Studies in Sanctions and Terrorism

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Case 89-2
US v. China (1989- : Tiananmen Square Massacre, Human Rights)

| Chronology of Key Events | Goals of Sender Country | Response to Target Country |
Attitude of Other Countries | Legal Notes | Economic Impact | Assessment |
Author's Summary | Bibliography |

Economic Impact

Observed Economic Statistics

As of end of June 1989, World Bank has $4.7 billion in loans to China in pipeline, of which $2.9 billion has yet to be disbursed. International Development Agency (Bank's soft-loan window) has $3 billion in commitments to China, of which $1.5 billion has not yet been disbursed. China also has $336 million in loans pending from Asian Development Bank. (Financial Times, 30 June 1989, 6; Wall Street Journal, 21 June 1989, A2)

In fiscal year 1988, China is largest beneficiary of Eximbank financing, receiving five loans worth $190 million. At end of FY 1988, Eximbank has $277 million in credits outstanding to China, as well as four preliminary commitments totaling $115 million for which funds have been approved if US firms win contracts. In addition, decisions are pending on preliminary commitments for $395 million in loans to China. (Financial Times, 30 June 1989, 6; Journal of Commerce, 7 February 1990, 2A; 9 February 1990, 4A; CRS 1989, 18, 27)

In fiscal year 1988, US Trade and Development Program supported 29 projects in China with total value of $6.7 million. (CRS 1989, 19)

Of $600 million in US arms sales to China in 1989, about $502 million is for project, still in developmental phase, to modernize F-8 fighter planes. China continues to pay for project under US Foreign Military Sales program after sanctions are imposed. However, on 15 May 1990, China cancels deal, citing projected cost overruns. Other major arms purchases include $28.5 million for technology, assistance to build artillery ammunition plant (already shipped); $62.5 million for four artillery-locating radar sets (two already shipped, two due in 1990); $8.2 million contract for torpedoes, ready for shipment. (New York Times, 6 June 1989, A1; Washington Post, 28 August 1989, A16; 12 December 1989, A20; 16 May 1990, A14)

In 1988, US approves $85 million in commercial arms sales to China. Average commercial arms deliveries to China in 1986-88 are $40 million. Defense Department estimates that about $130 million in commercial military sales are scheduled for delivery in fiscal 1989-90, that conclusion of $110 million in new Foreign Military Sales agreements could be at risk for fiscal 1989-90. (New York Times, 6 June 1989, A1; CRS, 1989, 20-21)

Cumulative value of French, British, West German, Italian arms deliveries to China in 1983-87 is $400 million. Other major arms exporters to China in recent years have been USSR, Israel. (Arms Control and Disarmament Agency 112)

China's debt more than doubles from just above $20 billion in 1986 to $46.9 billion in 1989; debt is owed about equally to commercial banks, international institutions, foreign governments. (Journal of Commerce, 21 June 1989, 7A)

World Bank estimates that foreign investment applications in China declined by 75 percent after June 1989, that access to medium, long-term borrowing on world markets has been "essentially closed off." (Washington Post, 29 June 1990, A1)

According to Minister of Foreign Economic Relations and Trade Zheng Tuobing in October 1989, about $10 billion in loans to China have been suspended since 4 June, no new official borrowing is under negotiation. (Financial Times, 27 October 1989, 26)

After June 4 repression, China has difficulty borrowing in foreign markets. In Japan, where Chinese state companies have floated ¥410 billion in yen-denominated bonds, Japanese firms refrain from making markets in Chinese bonds until political situation clarifies. (Wall Street Journal, 22 June 1989, A11)

Chinese borrowers face higher margins on international loans, with interest costs ranging from 1/2 to 3/4 percentage point above London interbank offer rate (LIBOR) compared with 1/8 to 1/4 percentage point earlier in year. (Far Eastern Economic Review, 2 November 1989, 48)

In January 1990, China says it will draw on extant $2 billion credit line from Japanese bank consortium to borrow $500 million, with repayment over 10 years in two tranches: at LIBOR plus 1/4 percent for first six years, and LIBOR plus 3/8 percent for last four years. (Financial Times, 17 January 1990, 4; 31 January 1990, 5)

China's Ministry of Foreign Economic Relations and Trade says sanctions "caused foreign loan agreements to drop by 51 percent to $4.8 billion." (New York Times, 23 January 1990, D8)

Chinese trade deficit rises to $6.6 billion in 1989 from $3.1 billion in 1988. In first quarter of 1990, however, China posts $1.6 billion trade surplus as imports drop 20.2 percent, exports rise 13.4 percent from same period in 1989. (Financial Times, 12 April 1990, 4)

Ministry of Foreign Economic Relations and Trade reports that value of China's high-technology imports dropped to $2.9 billion, or by 18 percent, in 1989. (New York Times, 23 January 1990, D8)

In 1988, tourism brings in $2.2 billion in hard currency, or about 2 to 3 percent of total foreign-exchange income; reduced tourism due to pro-democracy unrest, martial law could lead to loss of about $1 billion in 1989. (Wall Street Journal, 31 July 1989, A1)

China: Net official development assistance (millions of dollars)

 
US
Japan
EU
members
Other bilaterala
Multilateral
Total

1987
0.0
553.1
239.5
70.0
588.3
1461.7
1988
0.0
673.7
423.7
117.5
700.8
1924.4
1989
0.0
832.2
492.4
172.8
576.9
2076.6
1990
0.0
723.0
523.4
260.1
586.1
2092.5
1991
0.0
585.3
436.8
236.2
740.5
1998.7
1992
0.0
1050.8
901.8
136.3
966.2
3055.1
1993
0.0
1350.7
750.9
139.7
1030.0
3271.2
1994
0.0
1479.4
739.4
199.5
820.0
3238.4
1995
0.0
1380.2
1020.0
166.8
967.5
3534.4
1996
0.0
861.7
728.7
98.9
928.3
2617.6
1997
0.0
576.9
559.8
72.3
841.0
2040.3
1998
0.4
1158.2
478.0
95.1
707.8
2447.8
1999
38.3
1226.0
477.1
80.2
548.3
2384.6
2000
1.6
769.2
407.2
79.5
462.2
1735.0
2001
4.8
686.1
322.4
66.5
345.8
1475.6
2002
17.0
828.7
286.9
78.9
231.3
1475.2
2003
25.6
759.7
268.4
85.8
162.3
1320.2
2004
21.5
964.7
502.5
96.7
38.5
1661.1

a. From OECD and Arab countries.
Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients, various issues.


According to the World Bank, China would lose $7 billion to $15 billion annually in sales to the US market if MFN were revoked. (Financial Times, 10 November 1993, 4)

Without MFN, import duties would rise ninefold on average, according to an analysis by the US-China Business Council of the top 25 items purchased from China. With MFN the average tariff is 5 percent, without it is 45 percent. (Journal of Commerce, 20 May 1996, 2C)

The US embassy in Beijing reports that the lack of TDA and OPIC financing has put US companies at a distinct disadvantage compared to foreign competitors. (Inside US Trade, 19 August 1994, 16)

"In the aftermath of Tiananmen, new contracted US investment in 1990 was $537 million, 44 percent lower than in the previous year. Since 1990, however, foreign direct investment (FDI) rebounded strongly. From 1991 to 1995, the US supplied approximately 7.6 percent of the actual FDI to China. In 1995, over $3 billion in total were invested. The United States is the third largest overall single supplier of FDI to China." (US Department of State, Background Notes-China, 1997)


China: US and total foreign direct investment,a 1990–2004 (millions of dollars)

Year
US FDI inflow
Total FDI inflow

1990
30
 
3,487
 
1991
40
 
4,366
 
1992
74
 
11,088
 
1993
556
 
27,515
 
1994
1,232
 
33,767
 
1995
261
 
37,521
 
1996
933
 
41,726
 
1997
1,250
 
45,257
 
1998
1,497
 
45,463
 
1999
1,947
 
40,319
 
2000
1,817
 
40,715
 
2001
1,912
 
46,878
 
2002
875
 
52,743
 
2003
1,432
 
53,505
 
2004
4,228
 
60,630
 

Source: US Department of Commerce, Bureau of Economic Analysis, Balance of Payments and Direct Investment Position Data, accessed 15 June 2006; UNCTAD, World Investment Report 2005.

a. US flows reported by US sources. Total flows are Chinese statistics, which do not conform to international IMF and OECD standards. China’s Ministry of Commerce reports much higher US flows, about 10 percent of total FDI. See OECD, China: Progress and Reform Challenges, OECD Investment Policy Reviews, 2003; and UNCTAD, World Investment Report 2005 for discussion of discrepancies.

 

China: US Export-Import Bank loans
(1991-95)
(millions of dollars)
 

   
Year
Loan
     

   
1991
15.1
     
1992
72.4
     
1993
165.1
     
1994
187.9
     
1995
495.8
     
1996
n/a
     
1997
819.6
     
1998
0.0
     
1999
0.0
     
2000
0.0
     
2001
0.0
     
2002
0.0
     
2003
0.0
     
2004
0.0
     
2005
0.0
     

   

Source: Export-Import Bank, Annual Report, various issues.


Calculated Economic Impact
(Annual Cost to Target country)


Suspension of EC, US official and commercial arms sales; welfare loss estimated at 30 percent pre-sanctions level.
(1989- )

$48 million

Suspension of $780 million in World Bank loans; annual welfare loss estimated at 25 percent of face value of loans (1989-1990).

$195 million

Postponement for average of six months of official export credits, other official finance by US, Japan, Canada, EC; welfare loss estimated at 10 percent of face value of reduced transfers due to sanctions (calculated as 50 percent of 1988 value of gross bilateral disbursements, on grounds that some assistance started trickling back within six months, some projects were canceled for purely business reasons).

$79 million

Total

$322 million


Relative Magnitudes


Gross indicators of Chinese economy

 

GDP (1989)

$492.6 billion

Population (1989)

1,139 million

Annual effect of sanctions on gross indicators

 

Percentage of GDP

Negl.

Per capita

$0.28

Chinese trade with the US as a percentage of total trade

 

Exports (1989)

8.5

Imports (1989)

13.3

Ratio of US GDP (1989: $5,438 billion) to Chinese GDP

11


Source: IMF, International Financial Statistics Yearbook, 1997; International Trade Statistics Yearbook, 1997

Assessment

Henry Kissinger
"... China remains too important for America's national security to risk the relationship on the emotions of the moment .... Sooner or later, the punitive sanctions will fail, if only because the Chinese government cannot undo its past actions, and geopolitical realities will dictate a rapprochement between the United States and China." (Washington Post, 1 August 1989, A21)

Charles Krauthammer
"Deng has made it clear that politics takes precedence over economics. He knew full well what repression would cost in terms of economic development. For the sake of power, the ultimate Marxist-Leninist value, he decided to pay it." (Washington Post, 23 June 1989, A27)

A. Doak Barnett
"The resolution of the present conflict within the Chinese leadership will ultimately be determined by forces within China, not by what any outside power does .... Nevertheless, the signal that this action represents is worth sending, to both hardliners and moderates in China." (Washington Post, 5 July 1989, A16)

Nicholas R. Lardy, Brookings Institution
"The remaining [Tiananmen] sanctions … substantially disadvantage US firms vis-à-vis their European and Japanese competitors without imposing significant penalty on China. In short, economic sanctions provide the United States with virtually no leverage since there are alternative sources of supply for all major products American companies sell or might sell to China." (National Bureau of Asian Research 1997, 19)

Robert S. Ross
"The threat of ending China's MFN status to change its human rights practices has failed because Chinese leaders understood that Washington lacked the will to endure the costs of imposing sanctions .... During both [the Bush and Clinton] administrations, despite considerable U.S. bluster and threats, China paid no economic price for its intransigence—Washington neither affected Chinese policy nor did it follow through on its threat to impose sanctions. Ultimately, President Clinton's May 1994 decision to delink trade from human rights acknowledged policy failure." (Ross 13)

Author's Summary

Overall assessment  
Policy result, scaled from 1 (failed) to 4 (success) 1
Sanctions contribution, scaled from 1 (negative) to 4 (significant) 2
Success score (policy result times sanctions contribution) scaled from 1 (outright failure) to 16 (significant success) 2
   
Political and economic variables  
Companion policies J (covert), Q (quasi-military), R (regular military)
International cooperation with sender, scaled from 1 (none) to 4 (significant) 2
International assistance to target: A (if present)
Cooperating international organization EC/EU
Sanction period (years) 17+
Economic health and political stability of target, scaled from 1 (distressed) to 3 (strong) 3
Presanction relations between sender and target, scaled from 1 (antagonistic) to 3 (cordial) 2
Type of sanction X (export), M (import), F (financial) X,F
Cost to sender, scaled from 1 (net gain) to 4 (major loss) 2

Comments

Economic sanctions have prompted China to release a few individual dissidents and intermittently relax repressive policies. China's leadership, however, maintains the position that threats to the regime must be quelled.

Bibliography

Asia Society.China Council. China Briefing. Boulder,Colorado: Westview Press, various years.

National Bureau of Asian Research. 1997. Promoting US Interests in China: alternatives to the annual MFN review. Vol 8,no.4(July).

Arms Control and Disarmament Agency. 1989. World Military Expenditures and Arms Transfers 1988. Washington.

Congressional Research Service, Library of Congress. 1989. "China Sanctions: Some Possible Effects." CRS Report for Congress no. 89-424E, 24 July 1989. Washington.

Congressional Research Service, Library of Congress. 1996. "China: U.S. Economic Sanctions." CRS Report for Congress no. 96-272F, updated 1 October 1997. Washington.

Congressional Research Report, Library of Congress. 2002. “China-U.S. Relations.” CRS Report to Congress, no. IB9801, updated 17 May 2002. Washington.

Congressional Research Report, Library of Congress. 2003. “China” Economic Sanctions.” CRS Report to Congress, no. RL31910, updated 5 May 2003. Washington.

Congressional Research Report, Library of Congress. 2004. “China-U.S. Relations: Current Issues for the 108th Congress” CRS Report to Congress no. RL31815, updated 20 May 2004. Washington.

Facts on File, 1986, 1987, and 1989.

Ross, Robert S. 1998. China. In Economic Sanctions and American Diplomacy, ed. Richard N., Haass. New York: Council on Foreign Relations.

US Congress. US-China Economic and Security Review Commission. Testimony of Francis C. Record during China’s Military Modernization and US Export Controls. 109th Congress, 2nd session, 16–17 March 2006.

US House of Representatives. Committee on Foreign Affairs, Subcommittees on Asian and Pacific Affairs, Human Rights and International Organizations, and International Economic Policy and Trade. 1989. Statement by William F. Ryan. 101 Cong., 1 sess., 13 July.

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