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The G7 and China in the Management of the International Financial System

Professor John Kirton
Department of Political Science
Centre for International Studies
University of Toronto

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2. The G7/G8 Treatment of China, 1975-1999: from Adversary to Associate

The intellectual movement by outside scholars and think tank analysts towards contemplating in general terms a closer formal association of China with the PRC, fuelled in part by the challenges of the international financial system in the 1990's, has been matched by the changing treatment accorded to China by G7/8 leaders, ministers and officials themselves.

During the G7's first decade following its 1975 creation, China was relevant to it largely as a matter of context. China formed part of the adversarial environment the G7 faced as it increasingly dealt with a host of largely geopolitical issues. These focused on global arms control, such as nuclear proliferation, the missile technology control regime, and intermediate nuclear forces, and regional security issues, such as the Indochinese refugees, Kampuchea and stability on the Korean peninsula. While China was a direct calculation in the closed discussions among leaders and ministers, it was deemed neither sufficiently relevant nor sufficiently within the domain of potential public suasion or verbal deterrence to be worthy of direct mention in the G7's various communiqués.

This changed in 1987 when the Chairman's Summary on Political Issues at the Venice Summit included the passage: "In Asia, we agreed that particular attention should be paid to the efforts for economic reform undertaken by China." (Hajnal 1989: 352). For the first time China had become an object of direct public collective G7 attention, an implicit if highly tentative associate, an object of economic rather than political interest, and one whose domestic as opposed to external policies were of note.

It is useful to compare this initial treatment of China with that of the Soviet Union that year. The G7 at Venice declared: "We are following with close interest recent developments in the internal and external policies of the Soviet Union. It is our hope that they will prove to be of great significance for the improvement of political, economic and security relations between the countries of East and West. At the same time, profound differences persist; each of us must remain vigilantly alert in responding to all aspects of Soviet policy." (Hajnal 1989:345). It is noteworthy that the G7 recognized perestroika in both Russia and China with an equal, early significance, and directed at China none of the suspicion visited upon Russia.

The following year saw a decisive reversal in the G7's attitude toward China, prompted by the Tienanmen incident. The 1989 Paris Summit of the Arche, which received the letter from Gorbachev that ultimately led to Russia's inclusion in the new G8, issued a special "Declaration on China" that condemned China's violent repression in defiance of human rights. Here Canadian Prime Minister Brian Mulroney combined with host President Mitterrand, against the resistance of Japan and the United States, to achieve an endorsement of high-level sanctions aimed at China, including the suspension of bilateral ministerial contacts, and the suspension of the arms-trade and World Bank loans to China. With the Paris Summit celebrating the 200th anniversary of the practical political birth of the concept of human rights, the juxtaposition highlighted democracy and human rights as the core shared property of G7 members, and China's attachment to antithetical values. Moreover, armed with this referent, the G7 signaled its concern over Hong Kong.

However even with this emphasis on democracy, the 1989 Summit did include the hope that the interruption of Tienanmen would soon be past, and that the economic reform noted the previous year would be accompanied by its political equivalent. The G7 leaders declared: "We look to the Chinese authorities to create conditions which will avoid their isolation and provide for a return to cooperation based upon the resumption of movement towards political and economic reform and openness" (Hajnal 1989:408).

This same emphasis, led again by Mitterrand and Mulroney over the resistance of the US and Japan, arose at Houston in 1990. Despite a relaxation of their sanctions, the G7 continued to express collective concern, in part to exert a deterrent effect on future PRC action. However they did acknowledge some positive developments in China, and moved to support new lending that would contribute to the reform of the Chinese economy in the environmental field. Moreover, it was the environmental issue that brought China for the first time into the core economic Declaration, did so as one of a group of G7 associates, and rendered China an object of G7 applause. The G7 declared: "We applaud the announcement in London by some major developing countries, including India and China, that they intend to review their position on adherence to the Montreal protocol; and its amendments." (Hajnal 1990:22). Even in the immediate aftermath of Tienanmen, China had become an ecological associate.

At London in 1991 China was dealt with only in the Chairman's summary. But it now attracted a full paragraph and again was the subject of applause. The G7 welcomed "China's co-operation with the international coalition in opposing Iraqi aggression and over other regional issues. It approved a continuation of a process, already underway, of rebuilding contacts with China and concluded that "Unconditional extension of Most Favoured Nation status to China by the US would contribute to their goals." (G7 1991). The G7 had thus come to see China as a responsible associate in global security matters, and, in classic G7 fashion, was willing to link this to favourable treatment on economic issues such as trade.

At Munich in 1992 China again received G7 applause, this time for China's acceptance of major international arms control regimes. A paragraph in the Chairman's Statement described China's recent developments toward economic reform as "encouraging", but also called for "greater efforts toward political reform," and asked for "considerable further improvement" in human rights. It welcomed China's accession to the Nonproliferation Treaty and application of the Missile Technology Control regime, and expressed the hope that China would play "a more constructive role in the international sphere."

Although China was absent from the G7 statements at Tokyo 1993 and Naples 1994, it returned as a subject of attention and approval at Halifax in 1995. A "China paragraph" in the Political Declaration welcomed "China's growing participation in international and regional processes for "dealing with political, economic and security affairs." Noting that each member would pursue its dialogue with China "in the interests of a more stable and prosperous world," it looked forward to a smooth 1997 transition in Hong Kong "with the object of maintaining its economic prosperity and social stability." A subsequent paragraph called on the parties to a territorial dispute in the South China Sea to resolve their differences peacefully, in accordance with international norms.

By Lyon 1996, the G7's conception of China's relevance was focused exclusively, on arms control. Here the G7 welcomed China uniquely for joining with other G7 members and affiliate Russia in signing two treaties establishing nuclear weapons free zones in the South Pacific (with France, Russia, Britain and the USA) and in Africa (with the US, France, and Britain, but notably not G7 affiliate Russia).

Denver 1997 marked a step level jump in the attention the G8 accorded China. Surrounded by Russia's robust participation in the Denver "Summit of the Eight", the imminent transition in Hong Kong (taking place a mere two weeks after the Summit), and the visibility of the US-China relationship in the US, the Denver Declaration dealt with China in two ways. First it welcomed "the recent agreement among Russia, Kazakstan, Kyrgystan, Tajikistan, and China on reduction of military forces along their borders" and declared it to be "an important contribution to the region's security." Second, and most importantly, it dealt at length with Hong Kong. Here, amidst the attention devoted to the maintenance of Hong Kong's political freedoms in the post transition period, the G8 placed equal emphasis on the economic dimension. Noting the G8's "durable interests in this financial and economic center" it called for the preservation of stability, prosperity and an independent monetary and economic system, and noted that Hong Kong's fundamental freedoms and the rule of law were the essential underpinnings for Hong Kong's future economic success.

Behind this articulated agreement among the G8 lay a deeper consensus about China's relationship with the G7, at the moment of Russia's major step toward full admission. There were media reports that the Japanese, angry that the US had invited Yeltsin as a virtually full participant, were asking why China was not invited (Erlanger 1997). Yet no-one in the host US Government, or any other G7 government had considered including China in the G7 (Kirton 1997). There was an underlying if largely unarticulated conviction that China did not play by the rules of the game of democracy and free trade, to a degree unlikely to be changed by the APEC logic of ameliorating PRC's attitudes and action through inclusion, and the socializing effects of personal bonding among leaders in an informal setting. Equally, however, no-one in the US Government argued that there was a need to create a de facto G8, with Russia included, in order to counter a now powerful Chinese threat.

This consensus remained firm despite the acute debate raging in the United States about American policy toward China, a debate that pitted the business community against those from the liberal-left who were concerned about human rights issues such as Tibet. The geopolitical right also saw China as the emerging threat. The US and Japan tacitly endorsed a gentle version of this view. Responding directly to the Chinese missiles fired at Taiwan the previous year, they issued new defence guidelines allowing military co-operation in the extended maritime reaches off Japan (Fry, Kirton and Kurosawa 1998). The Chinese strongly opposed this move, viewing the extension of Japanese support for US military operations as aimed directly at them. Such an atmosphere heightened the conflict between the G7's historic role as the moral centre for rendering judgments about the practices of non-democratic regimes, including the PRC, and the latter's desire to play to the individual commercial self-interest of G7 members.

In preparations for Denver, the US, seeking a Congressional renewal of authority to trade with China on an MFN basis, proposed that the G7 issue a strong statement on Hong Kong. It was supported by Britain. Canada and other G7 members were cautious. However, all came to agree that the Denver Summit should issue an extensive statement of support for democratic freedoms in Hong Kong. In the leadup to Denver, the PRC learned that the draft G7 communiqué included a passage on Hong Kong. In keeping with their general aversion to having the G7 develop a view on China, they protested strongly. Yet none of the G7 suggested altering their proposed passage in response.

At Denver there was much private discussion among the leaders about China's intentions for Hong Kong, as well as an extensive treatment by the foreign ministers. The positions of the G7 members were consistent with those publicly seen in the earlier co-sponsorship of the UN resolution on human rights in Geneva and subsequently in the G7 members' decision to send representatives to attend the installation of the new legislature in Hong Kong (a ceremony which only the Americans and British ultimately boycotted). The US and the British pushed to have the G7 issue a strong statement of support for the preservation of democratic freedoms in Hong Kong. The Japanese, while quite concerned about the PRC takeover, were more cautious. Prime Minister Chrétien's and Foreign Minister Axworthy's interventions were consistent with Canada's very strong policy of engaging China. Its fixed axis was a commitment that no country would outflank Canada as a friend of China in the region. Despite these cautions, Canada fully shared the general anxiety about PRC behaviour, and the conviction that a clear statement of concern was required. Chrétien and his foreign minister stressed the importance of holding free elections for a new legislature within a year, a commitment they felt they had successfully recorded in the concluding communiqué. The leaders agreed that they would co-ordinate their positions on the handover. The extensive communiqué statement on China employed language the US had been using for months and emerged unchanged from the draft of a week earlier.

A second economic area which concerned China was trade. At the Spring 1997 news conference in Europe announcing NATO's enlargement and Russia's participation in the Denver Summit of the Eight, US Secretary of State Madeline Albright and Treasury Under-Secretary Larry Summers had indicated that the US looked forward to Russia joining the WTO on "commercially acceptable" terms. The Denver Summit of the Eight communiqué, in contrast, noted: "We support the goal of early Russian accession to the WTO on the basis of conditions generally acceptable to newly acceding members." The apparent softening raised the question of whether Russia might be a precursor for an early and special arrangement for the PRC to enter the WTO. However there was no G7 support for such a relaxation. The communiqué of the G7, meeting alone, affirmed this strict condition. It read: "We attach a high priority to expanding the membership of the WTO, on the basis of commitments to adhere to WTO rules and to provide commercially meaningful market access." In the case of China, the US in particular, with a major trade deficit with the PRC, remained strongly insistent that China accede to the WTO only when it fulfilled all the normal conditions. Canada's position was broadly similar, although Canada was prepared to support early access once the PRC met basic conditions for financial services liberalization and access for agricultural products.

Such issues highlighted the need for the G7 to remain an exclusive forum of like-minded members with advanced economic credentials and understandings to perform the essential task of stabilizing the world economy at a time of incipient crisis. Yet the onset of the Asian financial crises in the weeks and months following Denver began to change G7 attitudes. The autumn 1997 visit to Washington of Jiang Zemin, and his November 1997 post-APEC tour of Canada took place largely on the terms demanded by the PRC. They represented an act of normalization after the strained US-China relationship since Tienanmen and a reinforcement of the strengthening Canada-China relationship of the Chrétien years.

The shift in attitude was evident at Birmingham 1998, when host Tony Blair noted in his concluding press conferences that the G7 "paid particular tribute in the discussion we had this morning to the work that China has done in the aftermath of the Asian economic crisis and to its very strong commitment to financial stability." Indeed, it was only the late timing of the discussion that prevented the tribute from being encoded in the communiqué itself. (Bayne 1998).

At Cologne 1999, the focus on debt relief and Kosovo and the end of the 1997-9 financial crisis left little room for attention to China's relevance. Yet China's performance during these difficult two years left a lasting legacy. The G7 at Cologne decided to expand the membership of the new Financial Stability Forum (FSF), and to create a new, broader group (GX) of systemically important countries. The new member included Hong Kong in the FSF and China itself in the GX.

By the time of the Cologne Summit then, the G7 had come a long way from its historic absence of direct interest in China, and the Tienamen-bred treatment of China as an adversarial repressive regime. The G7's initial, pre-Tienanem interest in China in the domestic economic domain had expanded to embrace a full array of economic, political and global subjects, on a domestic, regional and international plane. Moreover, the 1997-9 financial crisis had brought China to a position where it was applauded by the G8 for it constructive role, and made a core associate in the new forums the G7 created to construct a new international financial architecture in the wake of the crisis.

It was thus not surprising that 1999 G7/G8 host, German Chancellor Gerhard Schroeder, visiting Tokyo on November 2, 1999 en route to China, publicly declared his support for a further step. Speaking at a news conference with Japanese Prime Minister Keizo Obuchi at the Japan National Press Club at the end of a three day visit to Japan, Schroeder called for China to "attend" become "involved in discussions" at, and become a "part of" the G8 summit in the future. Noting the size and importance of China, he argued: "In the 21st century, it will certainly be meaningful to involve China in discussions" on controlling and preventing regional conflicts and promoting international co-operation" (Suk 1999). In response, the host of the year 2000 summit Japan sounded a cautious note, asking publicly whether "a membership expansion would enable us to maintain effective policy coordination" and "whether China wishes to join." The same day, China publicly urged the G8 to listen more to Beijing and other developing countries, pointed out that China is the largest developing country, and expressed the hope that the G-8 could narrow the gap between developed and developing countries, while also promoting global stability and balanced development.

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