244. Memorandum From the Under Secretary of State for Economic Affairs (Cooper) to Secretary of State Vance1

Secretary Kreps’ Mission to China

Secretary Kreps’ May 5–15 visit to China went very well. It produced many tangible results and was full of good-will on both sides, conveyed in a very businesslike way. Juanita’s performance was excellent. She was characteristically gracious and in full command of the material under discussion.

The main tangible results of the visit were the signing of a claims/assets agreement (negotiated and initialled by Mike Blumenthal in March)2 and the initialing of a trade agreement negotiated during the course of her visit. We made clear that successful implementation of the trade agreement would depend on the successful conclusion of a textile agreement. Negotiations on that are to resume next week.

Credit for the trade agreement goes largely to Bill Barraclough and his interagency team, who worked under pressure for 10 days to produce the agreement. In the end, we got satisfactory treatment on most of the issues that we initially sought.

In addition, Juanita signed an agreement on trade exhibitions3 and four agreements involving scientific and technological (e.g., meteorological) cooperation. We also opened negotiations for a civil aviation agreement and a maritime agreement, but both of those will be difficult. To over-simplify, we want cargo sharing in the maritime agreement and the Chinese want “cargo” sharing in the aviation agreement, whereas in each case the other side objects.

Remarks on China and the Chinese:

We were very courteously treated throughout our stay. There was no political haranguing. There was much expression of good-will, followed by businesslike discussion of economic issues. The Chinese very much want to learn about how the international trading system works, and much time had to be spent in explanations to them, both of international practices and of our own laws. They made clear on many oc[Page 879]casions that they want to follow normal international practices in their trade and financial arrangements. They are used to operating much more on the basis of oral understandings than we, and much of our difficulty in negotiating the trade agreement was getting written down the level of detail which we find appropriate in international agreements. Moreover, Chinese hesitation vis-a-vis these negotiations was induced in part by what they consider their unhappy experience in the claims/assets negotiations. They now feel they yielded too much there, with insufficient assurance of cooperation by us in realizing their claims in the U.S. (this has now been worked out, I hope, satisfactorily.)

Vice Premier Deng was very impressive. He conveyed a clear grasp of Chinese needs and problems and he asked excellent questions about U.S. policies in the commercial field. He observed that two questions are asked frequently abroad about China’s rush to modernization: Would China continue on this course, and would it be able to pay its way? In response to the first question, Deng asserted that the policy of opening China up and the absorption of large amounts of foreign capital and technology has not changed in recent months. It is necessary for China’s development over the remainder of the century. He went on to observe that, international speculation notwithstanding, Chinese policy is not made by him alone, but reflects a broad internal consensus. Rather, the Chinese are readjusting their plans to take into account the practical realities and limits to rapid development. In particular, they have discovered a shortage of electricity and inadequacies in their transportation system. Thus, while their fundamental emphasis on agriculture and light industry remains unaltered, a necessary condition for realizing improvements there is additional investment in power and transportation. He also acknowledged a severe shortage of technological and managerial personnel in China. He indicated that to attract foreign capital, China would have to adapt its practices to acceptable international practices. In particular, foreigners would need a say in running joint venture factories, including the right to fire workers; and they would need assurances on their right to remit profits. China accepted this.

On the second question, concerning China’s ability to pay, Deng acknowledged this as an important constraint and suggested that for that reason China would look favorably on compensation agreements, i.e., agreements in which payment is made partly or wholly in terms of Chinese-produced goods. He also underlined the importance of getting greater access to the U.S. market through MFN tariff treatment.

Deng also questioned us closely, largely for his own information, on our policies regarding controls on exports of technology, and wondered out loud whether we couldn’t relax these controls since they make doing business with American firms difficult.

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Throughout our visit there were scattered references to the Gang of Four, but conversations did not dwell heavily on political issues. The question of our granting MFN to the Soviet Union was raised by Chinese trade negotiators only after the conclusion of the draft trade agreement, and even then somewhat offhandedly. The question of Taiwan came up only in discussions of civil aviation and maritime issues, where the Chinese authorities emphasized strongly their requirement that we not recognize the ROC markings as a “national flag.” They also underlined the necessity of our abolishing any intergovernmental agreements with Taiwan in these areas. They emphasized, however, that these two requirements need not lead to the alteration of actual shipping or aviation between the U.S. and Taiwan.

Apart from these few political references, almost all of our discussions were on the prospects and problems of the Chinese economy and on how improved contact with the U.S. and other industrialized countries can help.

  1. Source: Department of State, Executive Secretariat (S/S–I) Files: Lot 81 D 117, Principal Memo File, Apr–May–Jun 1979. Confidential. “CV” is stamped at the bottom of the first page.
  2. See Document 222. Kreps and Zhang Jingfu signed the agreement on May 11. (30 UST 1957; TIAS 9306)
  3. This agreement was signed on May 10. (30 UST 4472; TIAS 9470)