July 23, 1998

MEMORANDUM TO: OPINION LEADERS

FROM: GARY SCHMITT

SUBJECT: U.S.-China Policy

According to today's news reports, Chinese President Jiang Zemin has ordered China's military (PLA) to end its widespread practice of owning and operating commercial entities. The measure is apparently designed to help curtail the vast network of import smuggling operated by many of these companies, reduce the level of official corruption arising from the military's involvement in commercial transactions, and force the Chinese military establishment to turn its energies to professionalizing China's armed forces instead of lining its own pockets. If these reports are accurate, and Jiang Zemin is in fact able to implement his order, the result could be a significant victory for those in China interested in reforming an important segment of that regime.

The United States need not stand idly by. The most direct and immediate way to help reinforce this effort at reform is for the U.S. Government to prohibit PLA-owned companies from exporting goods to the United States or using American financial institutions to raise capital for their operations. Since it is now China's policy not to have the PLA engaged in business and trade, there is no reason for the U.S. to continue to reinforce the PLA's role in China's system of "crony capitalism" by maintaining normal trade relations with those companies.

Of course, the U.S. Government should also take this opportunity to remind the Chinese leadership that the principal reason for China's problem with smuggling is the high tariff-rates that the government imposes on imported goods. If China would eliminate those high tariffs and bring its tariff rates into line with those set by the rest of the developed world, the market for smuggled goods would largely disappear — along with, it might be added, a chunk of the $50 billion trade deficit that now exists between the United States and China.

If the policy of "constructive engagement" has any meaning it all, it surely includes the U.S. using its power and influence, when the opportunity arises, to help move China in a direction that promotes internal reform and responsible behavior internationally. Jiang Zemin's announcement provides the U.S. with such an opportunity: Ban trade with PLA-controlled companies.