224. Memorandum From Secretary of the Treasury Blumenthal to President Carter1

SUBJECT

  • Trip to China and Japan

While it is still fresh in my mind, I want to record for you my principal impressions of our visit to these two important countries. I will restrict myself to impressions only, and not dwell on specific items in our discussions or on the agenda of next steps in our economic relationship with China and Japan.

[Page 818]

I. China

The Chinese made a tremendous effort to be accommodating, to settle the claims/assets issue, and to insure that the visit be successful. I don’t believe that we could have achieved as good a deal if the leadership from the top down had not been determined to make a major effort.

There are probably two major reasons why they tried so hard:

First, it is a pretty safe bet that they appreciated your letting this visit go forward in spite of the Vietnam situation. They clearly saw it to their advantage, both as regards U.S.-Sino bilateral relations and in terms of the overall impact worldwide, to come up with an agreement.

Second, there is little doubt that the present Chinese leadership led by Deng Xiaoping is most determined to push forward with a rapid pace of modernization. They consider close trade and economic relations with the United States as essential for this purpose. They believe that settlement of claims/assets now opens the road to a trade agreement. To them, that means MFN and credits. If a trade agreement, extension of MFN and Ex-Im credits would not materialize within a year or so, strains in our bilateral relationship would almost certainly emerge.

One of the fascinating questions underlying the Chinese situation is how successful they are likely to be in their “Four Modernizations” program. No one can be sure on this score—and we should not count on a smooth course of events. My visit to China and my observations leave me with a strong sense of the tremendous obstacles they face!

First and foremost, we should not underrate the uncertainties and political instabilities inherent in the present situation in China. One senses a still tentative and uncertain coalition of those Chinese leaders committed to the new policy of pushing economic development based on a re-orientation of their economy toward trade with, and investments by, the West. As has been true for as long as anyone can remember, factionalism, regionalism, and the strains and stresses of a poorly united, vast country persist. Communication between the center and the provinces and coordinated implementation of policies laid down at the center remains spotty. As in all Communist nations, the problems of succession are not worked out. The change in direction which the leadership has now embarked on is so drastic—and so contrary to the policies and ideology of the past—that no one can say with certainty how long they will persist in this course, particularly when the going gets rough. A first conclusion, therefore, must be that a protracted period of political stability is essential for China to succeed on its present course. And that period of stability is anything but assured.

Secondly, the economic problems to be overcome are staggering. While great progress has been made since 1949, China has remained [Page 819]relatively insulated and untouched by modern patterns of industry and technology. The country almost totally lacks a cadre of competent managers, capable of running modern enterprises and of administering a development program. Also, China has lost a whole generation of teachers and students, technicians, scientists and others essential to the success of modernization. Rebuilding this essential infrastructure of human resources will be a major task and will take many years.

Meanwhile, there is the question of how effectively China can contain the expectations, now being awakened, for better things to come and for concrete results from the process now begun.

In her modernization effort, China has essentially two resources. One of these is as much a liability as an asset, i.e. a huge population base. The size of the population makes any saving and investment in a modern capital stock a herculean task. On the other hand, the large population also provides an opportunity for the country to utilize massive application of manpower to accomplish things that would be impossible in other cultures. Secondly, China can count as an asset the national character of her people who are accustomed to hard work for little pay, who have a high native intelligence and great ingenuity, matched only by much patience and persistence of application to difficult tasks.

The “Forever” bicycle factory I visited in Shanghai illustrates graphically these strengths, but also the inherent weaknesses. The factory is a veritable rabbit warren of innumerable small, dank, primitive, sub-standard buildings. The flow of materials and the production process is poorly laid out and reveals a lack of any real knowledge of modern manufacturing methods. The miracle is that such a factory can produce any kind of bicycle in quantities. Yet, the Chinese turn out 1,700,000 a year from that place. One has to see it to believe it! They do it with a massive application of people—3,900 to be exact—and with every machine in use, hand designed and manufactured on the premises.

By our standards, that adds up to dismal productivity, but it gets the job done and it provides at least the hope that with modernization the prospects for improvement and for increased efficiency could be enormous.

In my view, the key element which will determine the success or failure of the Chinese experiment will be the persistence with which the Chinese can pursue a flexible approach in their emerging dealings with the West. If they do indeed carry through their professed intention to shake off important elements of Communist economic dogma, and consent to foreign investment and the direct infusion of foreign management know-how, based on profit incentives, they have a chance to [Page 820]go forward rapidly. Whether they will do so, is as much a political as an economic issue.

At the moment, I sense a genuine commitment by the Chinese leadership to a close working relationship with the United States. They count on us—perhaps excessively and naively so—more economically than they do politically. The reservoir of goodwill for the United States among the people is as genuine as it is astonishing. It provides a great opportunity for us and we should not miss it. At the same time, it will be our challenge to bring to bear continuously the requisite patience and understanding in our economic relations with them. They are slow to trust a foreigner, but once they develop confidence, they value frank talk and they are not resentful of frank advice, if courteously given. They respect and admire Americans more than they are sometimes willing to admit. We should take advantage of this factor, coordinate our economic dealings with them, and not be afraid to counsel them to go slow and to avoid hazardous or premature forward leaps in the implementation of their “Four Modernizations” program.

[Omitted here is material related to Blumenthal’s trip to Japan.]

The visit overall was a fascinating one and in overall terms, I think, a success. We accomplished what we set out to do and that is always a good feeling.

On a personal level, it had for me, its moments of emotion and nostalgia. A return to China—in the way I went—was a major event for me. I was proud to be there as your representative, and as the representative of a great country.

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Agency File, Box 22, Treasury Department: 3/79–3/80. Confidential. At the top of the page, Carter wrote, “cc Mike. This is a good report. You accomplished the purposes of your mission. Well done! J.” Blumenthal gave this memorandum to Carter during a March 6 meeting to discuss the trip. See Document 225.