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17. Memorandum From Secretary of Commerce Kreps to the President’s Assistant for National Security Affairs (Brzezinski)1

SUBJECT

  • United States Trade Deficit With China

Your memorandum of March 7 states that the President has noted the sharp downturn in our exports to China and has asked what we can or should do about it.2 I believe it is useful that we understand the circumstances surrounding the turn-around in the Sino-American trade balance. The gross data do not reflect the distortion caused in 1973 and 1974 by Chinese purchases of huge amounts of U.S. agricultural commodities. With agriculture removed, the attached table shows an adjusted “balance” far more modest in the U.S. favor until the recent downturn.3

In 1976, however, total exports to China by the non-communist countries were off about 15%; Japan was down 26% and the U.K., 30%. Only West Germany showed a significant gain at 28%. The causes of this decline are attributable primarily to hard currency difficulties, political disruptions, and natural disasters. It is not surprising, therefore, that U.S. exports declined. The sharpness of that decline is traceable to a variety of bilateral factors.

Foremost among the factors currently affecting our ability to export to the People’s Republic of China (PRC) is the lack of fully normal diplomatic and trade relations. Diplomatic recognition of Peking, while no guarantee of increased trade in and of itself, would almost certainly result in greater purchases of American technology and equipment since Chinese commercial decisions are clearly affected by political perceptions.ons. For this reason, the United States to some extent has been a residual supplier of goods to which China turns only after having obtained most of what they need from those industrialized nations which recognize the PRC.

Extension of nondiscriminatory tariff treatment (MFN) to China, now governed by the requirements of the Trade Act of 1974, including [Page 52]the JacksonVanik Amendment,4 would assist Chinese exports, but the removal of this stigma of second-class status as perceived by the Chinese would be an even more significant stimulant of Chinese decisions in favor of placing more orders with American suppliers.

Absent fully normal diplomatic relations and the extension of MFN, resolution of the claims/assets issue would certainly facilitate the exchange of trade exhibitions, direct banking relations, and direct sea and air connections between the two countries.

From the viewpoint of the Department of Commerce, normalization of relations or, short of that, settlement of the claims/assets issue are the steps that should be considered. These steps would set the stage for easing or eliminating the imbalance in trade. However, trade is only part of the equation in the Sino-American relationship. Political aspects are paramount. An assessment as to politically feasible steps that can be taken lies within the province of the Secretary of State.

Juanita M. Kreps
  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 8, China (People’s Republic of): 3–6/77. Confidential.
  2. See Document 15.
  3. The attachment was not found.
  4. The JacksonVanik amendment to the 1974 Trade Act denied most-favored-nation trade status and trade credits to countries with non-market economies that restricted emigration.