Tuesday, November 29, 2005

"You can't shut out the world without shutting yourself in"
-Arnold Glasow

THE CHINESE CURRENCY CONTROVERSY:
I thought I should put this up as part of my research into China, emerging markets and stabilization and growth.

INTRODUCTION
The Chinese currency is the RenMinBi (RMB), generally pronounced Yuan in written form, but spoken as Kuai. Chinese paper money is available in RMB1, RMB5, RMB10, RMB50 and RMB100.

The Chinese have kept a fixed exchange rate of 8.28 Yaun/renminbi to the US dollar since 1995. In July 2005, the Chinese revalued the Yuan by 2.1%. Earlier this summer, the Chinese authorities abandoned the Yuan peg with the dollar, and linked the currency to a basket of currencies. The move immediately resulted in a 2.1 pct appreciation in the value of the yuan, raising it from 8.28 Yuan to the dollar to 8.11 Yuan to the dollar. The step was widely seen as a political move by China aimed at appeasing trading partners like the US and was widely praised by governments and economists as the 'first step' toward greater flexibility in China's forex regime.
But the US government finds that 'China's fixed exchange rate is now an impediment to the transmission of price signals and international adjustment, and imposes a risk to its economy, China's trading partners, and global economic growth'. The revaluation was appreciated but the US has clearly stated that it was not enough.


The build up:
Will China be unable to avoid a crash? Since 2003 Chinese banks' reserve requirements have been raised three times, but to little effect. Banks still have more than enough reserves and tighter restrictions have been placed on property lending. The central bank has also tried to use persuasion, asking banks to curb their lending to overheating sectors—again with little apparent success.
In the year to the first quarter:
Bank credit surged by 21%
GDP grew by 9.7%
Fixed investment by 43%
Inflation has risen from just 0.9% a year ago
Many economists reckon that the Chinese economy is even hotter than the official figures suggest. Based on electricity usage, annual growth may really be as high as 12-13%; and the true inflation rate is probably above 5%, as a significant number of prices are still controlled in some way by the government. On the other hand, official figures overstate the growth in investment, because the investment survey now covers more firms than last year. Even so, investment is still growing too fast.

Rumours are rife that the People's Bank of China is about to raise interest rates (one-year bank-lending rates are currently 5.3%) for the first time in nine years. The fact that this is even being discussed shows how concerned the Chinese leadership is about the investment boom. Wen Jiabao, the prime minister has said that China will take “very forceful measures” to cool its economy. This was followed by reports of a temporary freeze on new lending by smaller banks, later played down by China's banking regulator. Later the government announced tighter controls on investment projects and some new price controls. It clearly is desperate to curb new lending and investment.
The State Council, China's highest executive body, has issued new guidelines requiring companies to use more of their own capital and less debt to fund steel, aluminium, cement and property projects, the sectors which show most signs of overheating. Provincial government leaders have also been told to be stricter about approving investment in these sectors

Chinese Currency Controversies – Barry Eichengreen – A synopsis
Eichengreen’s article must be understood in the context of the timeframe within which it was written, i.e. early 2005. The situation has changed since then, and will be discussed further in this paper.

According to Eichengreen, since summer 2003, Chinese currency peg has been an issue for the US and the complaints have been political (due to slowing US growth, the US has argued that the RMB is overvalued.

However, the level of exchange rate is one factor fueling Chinese export growth (in fact, Chinese imports are growing faster than exports, producing a trade balance deficit).

He points out there is no question that eventually China will need to have a more flexible exchange rate, to accommodate its own distinctive business cycle conditions. But the Chinese are worried that a more flexible exchange rate would disturb expectation, discourage adjustments and growth and undermine (further) stability of the banking sector. According to most estimates, the inconvertible assets on the Chinese banking sector constitute as much as 40-50% of the GDP. He goes on to state that, “In a sense Chinese economy is facing the familiar exit problem that follows any exchange rate based stabilization.”

Implications:
Eichengreen recommends that China should move to a more flexible exchange rate sooner rather than later – the easiest time to abandon a currency peg following an exchange-rate stabilization is when there are large capital inflows and exchange rate is strong.

He argues that what is needed is not reevaluation (as argued by most experts of around 25%) but a new regime, in which China would be better able to tailor local financial conditions to local needs.

His recommendation for the best flexible exchange rate: a form of open-economy inflation targeting in which the authorities formulate monetary policy to limit deviations of inflation and growth from their respective targets. This implies intervening to limit currency fluctuations since exchange rate affects inflation and economic growth. In order to do that, he says China needs an increase in flexibility and limits on the extent of possible volatility.

Eichengreen clarifies that a more flexible exchange rate does not mean capital account liberalization. While controlled capital account rules out the possibility of a free-float, a managed float is possible.

The costs and benefits of the peg according to Eichengreen

Exports are the biggest factor in Chinese rapid growth; rising by 20% per yr, which also attracts FDI.

Is exchange rate peg important for this process? According to econometric studies there is little impact of exchange rate variability on trade and investment (I). It is more likely that economic reform and China’s entrance into the WTO, as well as, increase in global outsourcing fueled the growth. A modest change in level of exchange rate and/or shift to a higher level of variability would have only a moderate (if any) impact on growth in the short term.
- Multinationals are unlikely to be liquidity constrained as they could borrow. In China, foreign investment enterprises and joint ventures account for bulk of the exports.
- Main worry: impact of exchange rate variability on private domestic firms, as in case of difficulties, they would have to obtain financing from banks. But these firms contribute only to 10% of exports.
- Benefits: greater flexibility for People’s Bank of China (PBC) to be able to limit pro-cyclicality of money and credit. The peg results in misallocation of resources

Under a peg: positive shocks to A and Y -> positive shock to money and credit supply; increase in interest rates (which would damp the economic activity) is offset by increase in K inflows/ decrease in K outflows.
Pegging the currency prevents a) a move to a market-based monetary policy, because it reduces the extent to which monetary conditions are independent of the peg; b) use of interest rates to allocate credit, which leads to property lending and property market heating.
Peg leads to massive allocation of sR*, instead of private investment.



Alternatives
Step Revaluation – one-time revaluation on the order of between 10-40% to relieve pressure from the US, because of temporary slowdown in growth of China’s exports and cooling off of the economy, fighting off of the inflationary pressure.
This does not address the problems experienced under original peg, the problems are likely to reoccur and magnify because of expectations of future reevaluation and subsequent speculative capital flows. As K account grows more porous the problems will worsen.

If revaluation is too small would prompt expectations of future revaluation and more speculatory pressure on the peg. A revaluation that is too large would unnecessarily slow the growth of the economy.

Step Revaluation with a Shift to a Basket Peg – monetary conditions more stable because the currency would then not be tied to US economy. But this also doesn’t address the peg problems.

Step Revaluation with a Later Shift to a Float - the exact magnitude proposed (15-25%) may be a bit much and highlight drawbacks of the peg being in place before the float is introduced.

Arguments for delaying float: rapid K account liberalization threatens financial stability b/c of banking sector problems. However, this problem would not be compounded by a more flexible exchange rate system, which would allow slow K account liberalization while strengthening the banks. Another argument for delaying transition until K acc liberalization is that K controls prevent firms from using financial instruments to insulate themselves from crises.

Managed Float – Since K account is increasingly porous, China should move towards a more flexible exchange rate system. An initial adjustment of about 5% can be attempted to see if this slows accumulation of reserves and causes heating. If not, this doesn’t challenge credibility and authorities can further allow the exchange rate to go up. Since the currency can appreciate and depreciate the speculators would be deterred. If economic conditions change and market causes the exchange rate to move, the authorities could move the currency more or less so depending on the changes.

The underlying reason for a particular exchange rate regime is the monetary policy. When exports are the only dynamic sector, it makes sense to have a peg. Eichengreen recommends the PBC should weight the exchange rate and its range for fluctuation depending on how responsive the inflation and economic growth are to shocks. This is rudimentary form of inflation targeting. The band should be dome away with because if too small it may induce a shift and if too large it would not serve as a guide for monetary policy.

The rate should be managed to limit the currency’s movement, with the extent of permissible fluctuations as a function of shocks rather than being predetermined by the width of fluctuating band.

Eichengreen’s Arguments to keep the peg:
The peg served China well during 1997-8 Asian crisis – but was that really the K controls?
The unemployment rate is still high, therefore China needs rapid export growth to absorb unemployed workers
Allowing exchange rate to appreciate would cause K losses on sR* - this really deals more with any sort of appreciation rather than flexibility
A peg is good for the neighbors

Eichengreen’s Implications for Asian neighbors

The impact would be uneven:
-In low-income countries that compete with China in the unskilled labor-intensive production, would be beneficial because China’s labor cost would go up comparatively.
-In the next tier the effect would be less beneficial. Positive impact on unskilled labor-intensive production and negative impact on skilled labor-intensive production would cancel out. (China would move towards production in the former latter sector).
- In the most advanced countries the effects would be largely negative, b/c deceleration in China’s growth would decrease it’s demands for their exports.


Today’s danger:
The biggest fear that economists have today is the Chinese economy overheating. The hotter the economy gets, the greater the risk of a hard landing, and a repeat of 1994-95 when a previous investment bubble popped, leaving a hangover of excess capacity and deflation that lasted for several years.
However, Hong Liang, an economist at Goldman Sachs in Hong Kong, thinks that talk of a hard landing is premature, because there are several differences between today and the early 1990s. Policy has been tightened sooner this time. In 1993 inflation was already 15% (it rose to 28% at its peak) before the central bank tightened, while money-supply growth then was twice as rapid as today's. In the early 1990s, real interest rates were negative, falling at one point to minus 13%. Today, bank lending rates are positive (see chart). Even so, the level of 5.3% is far too low for an economy where nominal GDP is growing at around 15%.
A second difference is that unlike a decade ago, there has not been a consumer-spending binge. Private consumption grew by only 6% last year, compared with average growth of 14% in 1992 and 1993. That is one reason why last year China had a current-account surplus; in 1993 it had a deficit of 2% of GDP.

The debate:
The term “overheating” is normally used when an economy is suffering from excess demand, which then causes inflation to rise. But China's boom has been led by investment, which means that supply is booming as well as demand. As a result, the biggest risk to the economy is not inflation, but overinvestment. A glut of property or industrial capacity could depress profitability, bankrupt firms and swell banks' non-performing loans.
China's banking system, which is virtually all state-owned, does not allocate credit efficiently, and the misallocation of funds gets worse as growth speeds up. Bad debts may already be 40-50% of loans. In the long run, to improve this China needs to commercialize its financial system. That will require financial reform, as well as a transformation in corporate governance. But that will take years. Right now, the government needs to slow the economy to avoid another wave of bad loans.
Some economists draw analogies between China and Thailand before its financial crisis in 1997-98. Investment in Thailand also surged to more than 40% of GDP. The big difference is that Thailand had a current-account deficit of 8% of GDP in 1996. In contrast, China had a surplus of 2% of GDP last year, because its saving is even larger than investment. If China were running a large deficit, its currency would now be under severe downward pressure given all the concerns about its economy. Instead its foreign-exchange reserves are building up because of strong capital inflows, driven by speculation that it will have to revalue its currency.
Indeed, the undervalued yuan is one important cause of China's credit boom and rising inflation. China's capital controls are porous, and investors all over Asia are betting on a currency revaluation by buying property in Shanghai or Beijing or putting their money into Yuan deposits to take advantage of interest rates higher than the paltry level available in America. The yuan has been more or less pegged against the dollar since 1995. If, as a result of capital inflows, there is an excess supply of foreign currency, the central bank must buy it and sell Yuan to keep the exchange rate stable. This injects new liquidity into the banking system, thereby feeding the credit boom. The central bank has been issuing bonds to mop up the liquidity, but this “sterilisation” is getting harder as the amounts swell. The bank has had trouble selling enough bonds in recent months, so the money supply continues to surge.

China's pegged exchange rate is not only causing problems at home. America accuses China of stealing jobs by keeping the Yuan artificially low. In fact, it is not so clear that the Yuan is undervalued. On the basis of purchasing-power parity (ie, relative prices) it does look undervalued. But almost all poorer countries look cheap by this gauge, and over the past decade China's real exchange rate has risen. Andy Xie, an economist at Morgan Stanley, calculates that, in real terms, the yuan has risen by 40-50% against both the Dollar and the Euro since 1993.

But what about another apparently telling piece of evidence: China's huge trade surplus with America? This, argue American politicians, proves that the Yuan is undervalued. In fact it does not. China's overall trade balance was in deficit in the first three months of this year, thanks to strong import growth.

Another argument is that China's large surplus on its basic balance (the sum of the current-account and net foreign direct investment) and its huge build-up of foreign reserves are both symptoms of currency undervaluation. Mr Xie again disagrees. The increase in reserves, he argues, partly reflects speculative capital inflows. Moreover, if the capital account was opened (which is unlikely over the next four or five years), allowing firms and households to hold foreign assets, the Yuan would probably fall, not rise, as the Chinese diversified their savings.
These arguments help to explain why the Chinese have so far ignored American demands to revalue their currency. It is not just crude mercantilism; there is much uncertainty about the Yuan's correct value. The Chinese government says it will move towards a more flexible exchange rate in the medium term, but for the moment it wants to keep the Yuan stable in order to support broader economic stability. Yet in fact, a flexible exchange rate can offer more stability, partly by providing a safety valve which helps to protect the real economy.

The strongest argument for a revaluation now is not that the Yuan is undervalued, but that an adjustment would halt speculative capital inflows and so mop up the excess liquidity. It would be unwise for China to float the Yuan until it has cleaned up its banking system, but it could re-peg against the dollar at a higher rate and shift to a currency basket, which is what the government has said it would like to do. The snag, however, is that a small revaluation of only 5% might encourage expectations of a further appreciation and attract more capital inflows. Analysts claim that any revaluation would need to be large enough, say 10-20%, to head off such speculation. But a rise of such proportions would be unacceptable to the government, so the Yuan is likely to remain fixed for the moment.


The latest:
This month (November, 2005) Zhou Xiaochuan, governor of the People's Bank of China: Zhou reiterated the need for a stable, balanced exchange rate for the country's currency, the Yuan. 'China will continue to improve the managed floating exchange rate system and maintain a stable Yuan at a reasonable and balanced level,' Zhou said, repeating the standard phrasing of senior government officials used both before and after July's 2.1 pct revaluation. As expected, the revaluation of the Yuan in July raised the value of Asian currencies against the dollar, and there was ongoing speculation that China may revalue its currency as part of President George Bush's visit to the country this month, has not happened. The trip has inevitably set the markets talking of another possible revaluation of the Chinese Yuan, which prompted the People's Bank of China to deny rumors an emergency meeting to discuss the exchange rate. Most analysts think an imminent revaluation is unlikely

China’s July revaluation, loosening the currency's peg to the dollar and allowing it to trade within tightly managed bands. But since then the Yuan has barely moved and risen only a further 0.33 percent against the dollar, prompting further cries from Washington and increased pressure on the IMF to lean on Beijing over its currency practices. The IMF has stated that it is understandable that the Chinese economy needed time to adjust after the July 21 revaluation. But, the IMF also stated that it does see scope now for greater flexibility. According to the IMF, "Fixed-asset investment (growth) was running in the high 20's (percent) in recent months , which is probably too fast ... it certainly means that investment is perhaps still growing as a share of GDP."
David Burton, director of the IMF's Asia and Pacific Department has said that the rebalancing of growth from investment towards consumption would help China sustain its high economic growth rates and distribute the wealth across the population.
Rebalancing growth required a combination of policy measures and reforms -- and more flexibility in the yuan would help. A greater exchange rate flexibility would contribute to rebalancing the composition of economic growth by reducing distortionary influence in investment decisions and potentially raising consumption by boosting households' real income.

© All Rights Reserved Maithreyi Seetharaman 2005

Saturday, November 19, 2005

The following Question was posed to me in a class, and my response was as follows....do tell me whether you agree with my thoughts.


What makes good people do evil things? Do good and evil co-exist inside of each of us? And does our behavior mostly depend on the specific situation that encourages the good or the evil parts of us.
In 1971 Zimbardo's planned two-week investigation into the psychology of prison life had to be ended prematurely after only six days. In only a few days, his guards, randomly selected from a sample of college students, who answered a newspaper ad, became sadistic and his prisoners, who were selected from the same sample, became depressed and showed signs of extreme stress. What does this tell us, if anything, about the recent revelations about prisoner abuse in Iraq?


I do agree that the Q of what is good and what is evil is an infinite one and I add that it is also a Q that can't be based on human ideals of the same, or then again can it? Good and Evil are man-made concepts and ideals and the moral strictures within we co-exist as a society. Good and Evil are the basis of religions across the globe. The battle between the two concepts has founded every religion, whether major or minor and given them strength to grow and inculcate others into the fold. But is there an inherent evil within every human? I'd say yes, because that is the nature of man. Does that evil come to the forefront in specific situations, I'd have to once again say yes! Does control and power add to the temptation of allowing 'Evil' to rise to the forefront, I'd say sometimes. It is what is the perception of acceptable and unacceptable that allows for mankind to indulge in 'Evil'. Power adds to the aura of acceptability, as it comes in a gift wrapped package of invincibility. I believe every human being is capable of the highest level of 'Evil'. It is whether the moral strictures by which we exisit have a stronger hold over us that determines whether we indulge or not. A fact that can be substantiated by Mothers killing their children, female infanticide, genocide, or just war. Acceptability, Invincibility, Power!

© All Rights Reserved Maithreyi Seetharaman 2005

IN THE EVENT THAT IRAN IS FOUND TO HAVE NUCLEAR CAPABILITY: THIS IS AN ACADEMIC CREATION OF POSSIBLE POLICY OPTIONS AVAILABLE TO THE UNITED STATES

DISCLAIMER: PLEASE DO NOTE THAT THIS IS A FICTIONAL SIMULATION THAT HAS BEEN CREATED TO STIMULATE AN ACADEMIC DEBATE AND HAS NO BEARING ON REALITY. NEITHER THE UNITED STATES GOVERNMENT NOR THE IRANIAN GOVERNMENT REPRESENT ANY OF THE VIEWS PRESENTED BELOW

I. Executive Summary:
The recent evidence of the existence of an Iranian nuclear test site facility calls for a drastic revision of US policy towards Iran. A dramatic policy change in the short term would entail opening dialogue with Iran, allowing an Arab coalition to take centre-stage in any negotiations and acknowledge Iran’s right to civilian nuclear technology. Facilitating reformist and moderate factions to have a voice outside Iran will pressurize the fundamentalist government to be transparent. This maybe a suicidal path in the view of most US policy experts, but is the only viable option in this scenario.

II. Background:
A. Iran’s Current Political Situation: Four days after taking over, President, Mahmoud Ahmadinejad Iran decided to renew Iran’s Uranium conversion. Backed by fundamentalists, with a hard-line agenda, he has alienated reformist factions. His government is undercutting the legitimacy of Iran’s Supreme Leader Ayatollah Ali Hosseini Khamenei. Infighting is brewing between the two camps. Tehran is focused on internal politics whereby all Iranian factions will find it difficult to offer compromises to the West on Nuclear issues, in fear of criticism.[i]

B. Iran’s Relations With US and Allies: Iran claims its right for civilian nuclear power development and is supported by China, which sources 15% of it’s power from Iran and Russia, which is providing technology for nuclear power. Key issues for Europe and US are Iran’s view on Iraq and, the Middle East peace and stability, now threatened by nuclear capability. EU3 negotiations on Nuclear Issues have ended with Iran to be reported to the UN Security Council for flouting protocols. Russia & China are against this. But EU has strong trade relations with Iran. US dealings with Iran are hostile and through third parties since 1980. Inclusion in the ‘Axis of Evil,’ may have instigated current developments to forestall US pre-emptive action. Key concerns of the US are attacks to destabilize and colonize parts of Iraq, war against Israel thereby creation of war like conditions all over the Middle East and the creation of a nuclear terrorist state.

C. Role In The Region: Ahmadinejad is strongly against the existence of Israel. Under him, Iran’s claim to the northern territory of Iraq increases the risk of Iranian interference in Iraq, consequently a confrontation with the US.[ii] The new Iraqi government also has pro-Iran stance. An active state sponsor of terrorism, Iran’s Islamic Revolutionary Guard and Ministry of Intelligence and Security refuse to extradite Al Qaeda leaders and are involved in HAMAS, Hezbollah, and Palestinian groups.[iii] Iran is also mistrusted by Islamic powers such as Egypt and Saudi Arabia.

III. Short Term US Options

1. Maintain Status Quo Towards Iran. Introduce New Evidence To International Community. UN Sanctions With Consensus.
Pro: EU resolution requires Iran’s nuclear capability to be reported to the UN Security Council. The U.S can convene and present new evidence at an emergency meet. Member states will not be able to decline global sanctions against Iran in the face of such evidence. US sanctions must continue even as we confront Iran via Switzerland about the evidence. Border closures and coastline blockades by UN must take place so no trafficking of fissionable material is possible during negotiations. US will not be viewed as a ‘lone ranger’ as it was in Iraq.
Con: An unspecified date for reporting Iran, waters down the EU resolution. Tehran intends to end short-notice inspections under a special NPT protocol. Russia which has veto power, is building a $1 billion reactor in Iraq and China sources power from Iran. Both don’t support action against Iran. We may lack support of Iran’s non-US allied neighbors. Imposing sanctions along Iran’s Arabian and Caspian Sea coastline is difficult. Sanctions will drastically raise global oil prices and allow time to source fissionable materials officially or by other means.

2: Harden Stance Against Iran. Confront With Evidence. Conduct Pre-emptive Strike If Answers Are Inconclusive
Pro: Special Forces attack ensures fewer personnel and casualties. Aerial attacks can ensure destruction of known or suspected nuclear sites with no requirements for ground troops and allow a partnership with Israel. Militarize the region to pre-empt an Iranian attack by selling Arab states advanced weapons. A combined U.S. and regional exercise to show strength can be part of Washington’s declaratory posture of defending the region against a Nuclear Iran.
Con: US is over committed in Afghanistan and Iraq. US forces are stretched and cannot conduct a military invasion against a large and well armed state like Iran. We have failed in Iran before. We lack detailed ground intelligence on Iranian facilities and have the distance between Israel and Iran to contend with. Retaliation can be expected by Iran funded HAMAS and other terror groups. An Israeli attack will force the Islamic world to view it as a Zionist conspiracy against a fellow Muslim State, thereby increasing support for insurgents in Iraq. Iran could also close the Straits of Hormuz, blocking oil exports and take military action against Saudi and Kuwaiti oil facilities causing an international oil-supply crisis.

3. Present Evidence To UN Security Council, Remove Iran From Axis Of Evil, Open Dialogue With Iran. Arab Coalition For Negotiations Supported By Russia, China and India. Aid Pro Democracy Activists And Aid In Iran’s Civilian Nuclear Power Development.
Pro: Conclusive evidence will ensure an international consensus facilitating global action. Iran will agree to negotiate if it is acknowledged as an equal by the US. Direct dialogue will be more fruitful than using conduits. Iran’s right to nuclear energy for civilian purposes must be accepted as justifiable. By offering aid we receive access to their sites and can increase our monitoring and intelligence. Iran’s neighbors are proactive in the negotiations (despite Sunni-Shiite politics). Internally, Iran can justify negotiations with other Arab nations, Russia, India and China and its neighbors can ensure it doesn’t become the dominant power in the region. Reformists within Iran can create internal pressure to force transparency, in the long term fueling further reform by giving them an international voice.
Con: News of Iran’s capability may trigger an arms race, in the white and black market within the region. Oil Prices may skyrocket while Russia and China may choose their internal benefits and not support negotiations and sanctions. Opening dialogue will cause US to backtrack on policies against nuclear capabilities and its stance against terrorist states. Sunni-Shiite politics may override nuclear concerns, blocking the creation of an Arab coalition. Talking to Iran’s Fundamentalist government can close off the reformist factions within Iran, while simultaneously distancing Israel. This may also give Iran time to fully develop their nuclear capability.

IV. Recommendation To The President:
Option 1 is a tried tested and failed method. Option 2 is no longer an option. Option 3 appears to make the US eat humble pie. But with respect to the ‘War on Terror’, and the US position on Nuclear capability, Option 3 maybe the only way to avoid a nuclear war in an already unstable Middle East, thereby avoiding World War III.

[i] The challenges facing Iran’s new government, Mehdi Khalaji & Mohsen Sazegara, August 11, 2005, The Washington Institute For Near East Policy.

[ii]U.S. and Europe Gird for Hard Line From Iran's New President, By Robin Wright, Washington Post, Sunday, June 26, 2005; Page A17

[iii]United States’ Policy Toward Iran, R. Nicholas Burns, Under Secretary for Political Affairs, Statement before the Senate Foreign Relations Committee, Washington, DC, May 19, 2005

REFERENCES:
1. Hardball diplomacy goes public, Paul Reynolds, BBC Worldwide, October, 2005
2. http://www.state.gov/
3. Interview with David Frum, PBS, February, 2005
4. http://www.cnn.com/
5. http://www.stanleyfoundation.org/
6. http://www.nci.org/
7. Tehran Times

© All Rights Reserved Maithreyi Seetharaman 2005

On June 3rd and 4th, 1989 Chinese troops stormed the symbolic heart of China to disperse what remained of thousands of demonstrators protesting the government in Tiananmen Square. What began as a student movement to mourn the death of Hu Yaobang, the former general secretary of the Chinese Communist Party (CCP) and demand reform within the country, ended in a bloody crackdown and the deaths of thousands of students, Beijing citizens, blue collar workers and soldiers of the Peoples Liberation Army (PLA). The CCP leadership’s strategy in the lead-up to the Tiananmen crackdown was to ignore the student movement until it grew to massive proportions, later attempt dialogue with the students and almost 45 days later declare martial law, when citizens, unions and blue collar workers seemed to overtake the agenda. As student leaders called for an end to the protests in Tiananmen and began to disperse, on the night of June 2nd, unarmed troops began to attempt to clear the few thousand that remained but were driven back by the city’s residents. The CCP finally resorted to a bloody crackdown on the demonstrators, sending tanks and heavily armed soldiers into the city where they shot their way into the square, mercilessly clearing it.

The episode might have passed un-noticed by Western nations if not for the live broadcasts of the confrontation by the international media, which was in Beijing to cover the state visit of Soviet President Mikhail Gorbachev. The globally broadcast images of the Tiananmen Square crackdown, created an international furor against what were perceived to be China’s human rights abuses. But, the CCP stood by it’s stance that the demonstrations were de-stabilizing, unpatriotic and counter-revolutionary. The CCP claimed that the demonstrations were aimed at overthrowing the Peoples Republic of China and its socialist system and international media reports on the number of deaths and sequence of actions by the party were baseless. China viewed the incident as an internal matter and refused to allow any nation to influence their course of action after the incident. But the images of protesting students being beaten, shot and possibly persecuted, created immense pressure within the United States to react and protest the CCP’s actions. Despite his personal affinity to the Chinese, and under pressure from US citizens, the US Congress and the Senate, US President George Bush issued the first sanctions in the world against China. But, the Bush Administration silently also kept the back door channels of communication open with the Chinese leadership during the period, fearing a complete breakdown in the burgeoning fragile relations between the two countries.

Recreating the Tiananmen Square incident by using “A Framework of Analysis,” by Michael Brecher, this article will attempt to study the reactions, perceptions and policy processes of China and the US toward each other, during and after the episode. This will require the classification and explanation of the operational and psychological environment of both countries and the relationship between the two environments to determine the effectiveness of decisions taken by both sides. This relationship of the two environments, according to Brecher provides a technique to measure success in foreign policy decisions. If the decision makers perceive the operational environment accurately, their decisions will be rooted in reality. If this is not the case, the gap between the elite defined objectives and policy outcomes will cause those decisions to be unsuccessful.[1]

Like all systems of action, the foreign policy system comprises an environment or setting, a group of actors, structures through which they initiate decisions and respond to challenges, and processes which sustain or alter the flow of demands and products of the system as a whole.[2]

A foreign policy system maybe likened to a flow into and out of a network of structures or institutions which perform certain functions and thereby produce decisions. These in turn feed back into the system as inputs in a continuous flow of demands on policy, policy process and products of policy.[3]

Through the Eyes of China:

Operational Environment:
The operational environment comprises two general types of variables external and internal.[4]
"It has long been argued that the socialist world will adapt to the capitalist marketplace and the future of the Pacific basin will be a triumph for market principles. But China, the Soviet Union and reformist socialist countries have a different view. Closer cooperation between leading socialist states would enable them to change the rules of the wider Pacific game. China's negotiation for membership in the General Agreement on Tariffs and Trade, or GATT, suggests that socialist states can gain acceptance to non-socialist clubs by pretending to observe capitalist rules while remaining basically command economies."[5] This was the global view of China in the late 1980s as the Communist led nation inched closer towards the global community. After two decades of isolation, in 1972 the US began a slow engagement policy with China under Richard Nixon. In 1979, both countries began formal diplomatic relations and opened embassies. But the Chinese leadership, the remaining elders from the Cultural Revolution, was cautious in their dealings with the United States and the rest of the world. The Chinese were well aware of their position in the Cold War as the chip that could tilt the balance of power between the super-powers, the Soviet Union and the United States. But China’s relations with the Soviet Union were cold at best. The world’s second most powerful communist country having cordial ties with the United States would keep the Pacific and Asia from becoming a power centre for the Soviet bloc.

The Chinese people were fiercely inward looking and the government was opaque, a characteristic still firmly rooted in the Chinese system.[6] But with growing economic reforms being put in place by the CCP, encouraged by CCP Chairman Deng Xiaoping, China was also becoming an economic powerhouse. A 10 year project of economic reform and engagement with the West led to rapid international investments with China gearing for further economic reforms. This transformation movement by the CCP had eased many worries in the West and discussions were fast and furious about the consequences of allowing China entry into the GATT.

In the study of the subordinate system of intermediate levels of interactions namely those of China and it’s neighboring countries, China in 1989 was seen to be improving its relations with the Soviet Union. China and the Soviet Union had cut off relations in 1963 and Gorbachev’s State visit just days before the Tiananmen Square crackdown were aimed at normalizing relations between the two countries. The Soviet Union had seized over 3 million square kilometers of Chinese territory (Outer Mongolia and North East China) after World War II and had returned only North East China in the years that followed. The Chinese were also bitter about the post World War II Yalta conference when in the eyes of the Chinese, the US and the Soviet Union had attempted to divide China. The Chinese were also attempting to normalize embittered relations with Japan while the question of the withdrawal of Vietnamese troops from Cambodia still hung over the Chinese Leadership.[7] Taiwan was a source of constant friction while the PRC maintained close military ties with North Korea and had close ties with Pakistan, Sri Lanka and Bangladesh.

While Economic growth in the new millennium may have changed China’s global political standing, its domestic structure is still similar to what existed in 1989. Tiananmen and its aftermath cracked open the shutters on one of the most secretive political systems in the world.[8] State power within the People’s Republic of China (PRC) is wielded by the CCP, the State, and the Army. The PRC is an oligarchy where a culturally and geographically vast country is ruled by the leadership of the CCP, the State and the Army. Central government leaders build consensus for new policies among party members, local and regional leaders, influential non-party members, and the population at large. However, control is often maintained over the larger group through the manipulation of information, propaganda and censorship. In 1989, ‘the elders’, the remaining leaders of the Cultural Revolution were still central to all decision making processes of the CCP’s standing committee. The CCP’s highest body is the Party Congress, which is supposed to meet at least once every 5 years. The party elects the Central Committee under which the primary organs of the CCP function. The organs include the Politburo Standing Committee, the Politburo, the Secretariat, the Central Military Commission and the Discipline Inspection Commission.

The primary organs of state power are the National People's Congress (NPC), the President, and the State Council. Members of the State Council include the Premier, a variable number of vice premiers, state councilors, 29 ministers and heads of State Council Commissions. The NPC is the highest organ of state power in China approving major new policy directions, laws, the budget, and major personnel changes. Most national legislation in the PRC is adopted by the Standing Committee of the National People's Congress. Most initiatives are presented to the NPC for consideration by the State Council after previous endorsement by the Communist Party's Politburo Standing Committee.

While explaining the internal variables of the Chinese Operational environment, it must be remembered that the Chinese Army or the PLA’s actions were a shock to the people of China. "No Chinese can explain the savagery of the 27th Army-why the army of the people turned into the killers of the people, leaving thousands dead. This was not only unexpected, but also a departure from the traditional behavior of an army which owed its success to its relationship with the people."[9] The PLA combined power balance politics and it’s role as a modern national army with top army personnel holding high CCP ranks and taking part in political decision-making. "Power cliques are generated from within by operational structure of the PLA. Promotions have been based on sponsorship by higher-ranking officers. A network of career obligations emerged in which each high-ranking officer had his own pyramid of men owing loyalty to him. These networks often had a regional component; military-region commanders played major roles in promotions of officers serving in 'their' units. Both Mao and Deng Xiaoping realized the danger inherent in this, and undertook occasional rotations of military-region commanders to prevent development of strong power bases around the PLA."[10] Despite the precautions taken by CCP elders, units had special relationships with top leaders and inevitably followed their lead in the political stance they took. The military was and continues to be an independent structure answerable to the top leadership only through the Central Military Commission.[11] Although hard-liners seemed to have the upper hand in China in the aftermath of Tiananmen, moderates remained a potent political force. The reason, quite simply, was that they were backed strongly by the military, and the military in 1989 became the strongest political force in the country.[12] The one official position that Deng Xiaoping had not relinquished in 1989, was the same one that Mao Zedong relied on to maintain ultimate authority during the Cultural Revolution – the Chairmanship of the Central Military Commission. The position allowed Deng complete control over the armed forces with no interference from the Party Chairman, Premier or the Minister of Defense.

Although the leaders occupied distinct official posts in a triad of organizations – the ruling CCP, the State Council (the government cabinet) and the Central Military Commission, behind the scenes they functioned as a small and informal group of 10 decision makers and their staff. They were joined in their deliberations at crucial moments by the eight ‘Elders,’ China’s powerful extra-constitutional final court of appeal. Three of the elders were the most influential and the final say among them, belonged to Deng Xiaoping.[13] The Chinese leadership was factionalized, and this factionalism was central to creating the concept of the supreme leader, Deng Xiaoping. But while Deng’s power was not absolute, with two other party Elders having strong voices in the decision making process, his role was extra-constitutional, but not illegitimate.

In the Chinese system, there are no horizontal organs, courts or legislatures, with institutionalized powers to resolve deadlocks. The big issues are extruded upward and create the pressure for someone to take ultimate responsibility. The decision to use force to resolve the Tiananmen Square demonstration was the result of this.[14]

But outside this power triangle were various other interest groups: mainly the Chinese intelligentsia, worker’s unions and the student community. During the process of reform, from 1979 to 1989, the government had been tolerant and had sported a relatively lax attitude towards the student movement which was pushing for reforms on the political side as well as the economic. The student movement shared many of its goals and language with the CCP. “But by bringing their slogans off the campuses into Tiananmen Square, the centre of the capital city, the students further thumbed their noses at Party control. Still, most of them stayed within the bounds of certain pieties, acknowledging Party leadership and positioning themselves as respectful, if disappointed supporters of the Party’s long term reform project.”[15]

Another Chinese interest group was that of the Intelligentsia. They were successful artists and literati who doubled as party cadres, publishers and university department heads, the “backbone of society.” These academics did not want the ‘western’ version of democracy, but an increase in the levels of political freedom accorded to the Chinese people. In later years, many of those who supported the student demonstrations in 1989 said, “Frankly speaking, the life we're leading today has far surpassed the extent of freedom we imagined back then. In the history of China, I'm afraid; the people have never been so open and free. The Western world has no way of understanding this."[16]

In 1989, the primary supporters of the government consisted of rural peasants who had seen their incomes increase considerably during the 1980's as a result of the Deng Xiaoping reforms. However, this support was limited in usefulness because rural peasants were distributed across the countryside. In contrast to urban dwellers that were organized into schools and work units, peasant supporters of the government remained largely unorganized and difficult to mobilize.
The second group consisted of urban industrial workers, who believed that the CCP’s reforms had gone too far. The loosening economic controls had begun to cause inflation and unemployment which threatened their livelihood. Without independent unions or peasant associations to protect their interests, workers were dissatisfied and pushing the CCP to address concerns over corruption, unemployment and economic disparities.

The demonstrations of Tiananmen Square were an ‘Anomic Outburst’ into the political system, where latent discontent was sparked by the death of formal General Secretary Hu Yaobang leading to student protests that quickly became demonstrations that threatened the CCP.

With no competing elite’s to vie for authority to make political decisions within the system and offer alternative general sets, interest groups with specific policy demands would have to present them to the same single party authoritarian system. This is what happened in the lead up to the crackdown on protestors in Tiananmen Square. Pressures on policy were handled by the competing factions within the CCP, the Standing Committee and the Elders, leading to many who protested the harshness of Deng Xiaoping and Li Peng’s methodology to end the protests being ousted from the Party and those who supported the decision, moving up the ranks of the CCP.

While the operational environment, exists independent of it’s perception by decision makers, it can have an impact on the foreign policy process only to the extent that it is communicated to the elite.[17] The Central leadership displayed a voracious appetite for raw information. The intelligence flow was impressive in terms of quantity but less so for analysis. The two security ministries provided a flow of information through the day on events. The CCP’s official news agency which is also an intelligence service, ‘Xinhua News Agency’ provided extensive coverage within China and foreign reactions to Chinese events. It is striking that in an authoritarian police state such as China, its leaders were keen to keep close tabs on public opinion. Domestic intelligence was frank and informative. They were mercilessly honest about the ideological doubts in the population but were long on incident and short on analysis. This allowed many leaders to continue to believe that the mass uprising resulted from manipulation by a tiny minority.



Psychological Environment:
It is also of utmost importance to identify the person(s) and/or group(s) whose images of the operational environment shape decisions. The decision making elite in this case was China’s Supreme Leader Deng Xiaoping. Additionally the seven other Elders, CCP leader Zhao Ziyang, Premier Li Peng and the members of the Standing Committee had an influence on the information flow to Deng. Each had their own agenda, opinion and stance, leading to a break in the leadership. While Zhao was against the use of force and wanted to negotiate peacefully with the students, Li was adamant that the student movement was being hijacked by a few and needed to be confronted and put down. Any concession according to him would seriously undermine the prestige of the government and of Deng’s authority. This deadlock had to be taken to Deng, who sided with Li and along with the Elders decided to fire Zhao and replace him with Li Peng.

Every decision maker operates within a context of psychological pre-dispositions. In this case, Deng Xiaoping was a leader steeped in the philosophies and learning from the Cultural Revolution. As he described himself, he was “the core of the second generation of CCP leadership.” While he changed numerous facets of how China functioned, internally and with the rest of the world, he still held close the belief that the third generation of the CCP needed to win the people’s trust and achieve tangible results. He held the view that China could not return to its isolation. China’s long history of being dominated and subjugated by conquering powers had made him and other CCP leaders wary of interaction with the West, viewing the US as a hegemonic power that could over-run China and East Asia by influencing the region’s policies. But Deng also had close relations with US President George Bush and recognized that to sustain the pace of economic reform, interaction with the West was essential.

An impulsive decision maker,[18] Deng’s vision of political reform was limited, but his view of economic reform and the subsequent opening up to the West wasn’t. He was a firm believer in the sovereignty of the Chinese people and considered any external interference within China as an outrage. The decisions and actions of the CCP against student protesters was an internal matter and Deng ensured that that viewpoint was communicated clearly to the West. As US sanctions came into effect, in the aftermath of Tiananmen, Deng’s perception of reality and not reality itself took over. He felt that various aspects of US Foreign Policy had cornered China, that the US was basing its decisions on rumors and that if a country was to formulate it’s policies on the basis of such, the Government of that country would suffer to a great extent.[19] He was of the view that the demonstrations had been counter-revolutionary and aimed at overthrowing the PRC and that controlling such traitorous behavior was the inherent and legal right of the PRC. “The cause of the differences between our two countries was not because China had offended or impinged upon US interests. It was the US which on a large scale impinged upon Chinese interests and had injured Chinese dignity. With regard to how to resolve the issue, there is a Chinese proverb – it is up to the person who tied the knot to untie it. It is our hope that in its future course of action the US will seek to untie the knot.”[20]

Process:
When troops were dispatched on June 3rd and met resistance from demonstrators, on June 4th, Li Peng and the Standing Committee called them ‘rioters’ who were brazen and lawless. Xiaoping wanted Tiananmen Square cleared before June 5th and stated that troops were to be reasonable with the students and resort to ‘all means necessary’ only when all else failed. Further orders were for the PLA to be seen as standing with the people and not shedding any blood within the Square. The battle on the 4th was kept outside the Square and no blood was shed in the Square. Firmness with the ‘counter-revolutionaries’ and prevention of the destabilization of Chinese security also meant the decision to prosecute and kill the leaders of the ‘rebellion.’ To prevent the outbreak of a similar riot or even a potential ‘civil war’ Deng Xiaoping wanted the rumors of the number of deaths to be quashed. He believed that the American News Service, Voice of America was at the forefront of spreading the ‘rumors’ and suspended their operations in China. According to Deng, “the Chinese people will never tolerate any behavior that violates international norms, nor will they bend under pressure. Our use of martial law to deal with the turmoil was absolutely necessary. In the future we will use severe measures to stamp out the first signs of turmoil as they appear. This will show we don’t put up with foreign interference and will protect our national sovereignty.”[21] But Deng was clear that while the PRC would strongly prosecute those who had attempted to subvert the Party, students were to be forgiven and not tracked down. But all demonstrations, assemblies, news reports, marches etc were to be controlled and suppressed. When the US suspended all exchanges of military and diplomatic personnel, China reciprocated.

During the early days after the Tiananmen Square incident, Deng was clear, “We don’t care what others say about us; all we care about is a peaceful environment for our own development. We won’t close any doors; our biggest lesson from the past has been not to isolate ourselves from the world.”[22]

The Chinese were on a firm road to Economic reform prior to Tiananmen, though inflation and corruption had taken a toll in the process. Post Tiananmen, Deng had a harder time re-starting economic reforms. Party hardliners felt that the reforms had led students to a more capitalist thought process and had exposed them to Western concepts of political reform. But Economic reforms did take centre-stage. The Party Central and State Council were given the authority to put specific long term plans targeted towards growth, infrastructure, small and big enterprises and resource development. Corruption within the Party cadres was made a priority even as external aid to China had almost completely stopped. In June multi-lateral banks, led by the US along with other nations halted all loans to China and the US also put restrictions on Chinese exports.

On June 9th, 1989, Deng stated in a public appearance that “Right now international public opinion is raging against us, but we can take it; we won’t let them get to us. The recent events have brought our mistakes into the open. Only socialism can save China and turn it into a developed country. China has no future outside the socialist road.”[23] His biggest fear was that if China buckled under international pressure, it would always be someone’s satellite country, something that the Chinese feared most after the 150 years of subjugation they had faced after the Opium Wars.

When the US violated its own sanction against official visits and sent Brent Scowcroft as President Bush’s emissary to Deng, he was clearly told in response to US sanctions that, “It is an old saying in China that emotion is no substitute for policy.”[24] But it was also clear through the meeting that in its effort to ensure the meeting occurred; the Chinese were as interested as the Americans, not to obliterate the relations the two had built due to Tiananmen
Through the Eyes of the United States:
Operational Structure:
In 1989, towards the end of the Cold War, the United States saw a new President take office. The world that the Bush Administration encountered was one of bi-polar super powers that had existed since the end of World War 2. 1989 saw the US and the Soviet Union, reaching out towards each other with hesitant hands of friendship, while the Cold War memories and attitudes still made both cautious towards each other. The world was still divided into two blocs and China was the key to the control of Asia by either the Communists or the Capitalists. Since 1972, when President Nixon re-started relations with China, the US had been attempting to ensure that the Soviet Bloc did not win any friends on the Chinese side. During President Reagan’s tenure, US-Soviet relations had improved considerably due to the efforts of Mikhail Gorbachev and Reagan. Relations between the two had begun on the assumption that the Soviet Union was an “Evil Empire” and attempts were made through economic and arms build ups to trigger the Soviet Union to collapse, but in later years, Reagan and Bush came to believe firmly in Gorbachev’s ‘Perestroika’.[25] In1989, the world was on the brink of the end of the Cold War and the US was attempting to become the only remaining super power. In his inaugural speech in January 1989, President George Bush told the citizens of the US, “Great nations of the world are moving toward democracy through the door to freedom. Men and women of the world move toward free markets through the door to prosperity.” That was the key to all diplomatic and military relation that the US engaged in – Trade.

In the 1980’s China’s Supreme leader Deng Xiaoping had embarked on a new economic reform effort. To many observers including those in the US Administration this appeared to be a move towards liberalization but at the same time the Administration recognized the fact that at no time did Xiaoping offer any fundamental political reform.

Internally, President Bush took over a country that was in a relative peaceful and prosperous phase. He was the commander-in-chief of the US Armed forces which was an essential deterrence factor as well as one of the most important negotiating factors for the US in its diplomatic efforts. The PLA and the US army had a number of exchanges of military personnel for training and regularly sold arms and technology to the Chinese.

The US is the world's largest energy producer, consumer, and net importer. It also ranks eleventh worldwide in reserves of oil, sixth in natural gas, and first in coal. Between 1972 and 1988, the US and China had become major trading partners, each contributing over 10 percent to the other's total trade figures. Major US corporations such as IBM, Boeing and Chrysler along with hundreds of smaller firms had made major investment commitments to China. The range of products sourced in China steadily grew as US investors saw significant opportunities in China.

The world’s largest consumer was also the founder of the concept of democracy. The political structure remains the same as it was in 1989 and before. The President is both the Chief of State and head of government. The US Cabinet is appointed by the President with Senate approval. The US government is an elected body of representatives where the president and vice president are elected on the same ticket by a college of representatives who are elected directly from each state. The President and Vice President each serve four-year terms. The US governing system also possesses the Senate which has 100 seats, one-third are renewed every two years; two members are elected from each state by popular vote to serve six-year terms and the House of Representatives with 435 seats where members are directly elected by popular vote to serve two-year terms. There are two competing political parties within this governing democratic system, the Republican Party, Democratic Party, and the Independent candidates who belong to neither party. The country has a strong independent judiciary, and has as its supreme judiciary body, the Supreme Court which is the final word on the judicial character of the country. Its nine justices are appointed for life on condition of good behavior by the president with confirmation by the Senate. The country’s other judicial arms are the United States Courts of Appeal; United States District Courts; State and County Courts which follow a federal court system based on English common law. Each state has its own unique legal system, of which all but one (Louisiana's) is based on English common law.[26]

Towards the end of the Cold war, two issues loomed large in the relationship between the US and China: human rights and Taiwan. After Tiananmen, Robert L. Suettinger author of Beyond Tiananmen: The Politics of U.S.-China Relations, 1989-2000 argues, "The bilateral relationship lost its insulation from domestic politics." This is not a trivial insight. Lacking a sophisticated understanding of the forces influencing the policy process of the other, neither country has been very successful at anticipating the other's policies or foreseeing likely responses to its own initiatives. Chinese bellicosity toward Taiwan had only strengthened the hand of those in the United States most eager to expand Washington's defense commitment to Taipei.[27] Human Rights activists such as Human Rights Watch and Amnesty International to name a few were also lobbying hard for a more stringent US response. Human Rights watchers were extremely disappointed by what they perceived as a muted response by the Bush Administration and attempted to influence the decision making elite through its opposition and through the Congress. The Congress then attempted a number of sanctions against China which were vetoed by the President, while the Opposition pressurized the President to withdraw the US Ambassador to China and break all diplomatic ties with the country.

The communication flow from China to the Bush Administration, which the Chinese believed to be incomplete and inaccurate, was startlingly continuous and varied. It included cables from the US Ambassador in China, CIA intelligence reports, intelligence reports from operatives of other nations within China, global media reports and eye-witness accounts of US students and other citizens in Beijing. As the day to day crisis came to an end, through the month of June, the Administration relied heavily on its diplomatic mission and the CIA to provide a day to day account of the CCP Leadership’s decision making. Initially, the reports were varied and as George Bush put it, “the reports are still crazy; there are rumors that Li Peng has been shot and that Deng was dead. All this tells me to be cautious and be calm.” As the reports became more accurate, the Administration reacted with the placing of sanctions.

Psychological Environment:
George Bush had a keen personal interest in China, understood the Chinese perception to a greater deal than most and had close relations with many Chinese leaders. He had been the US’s UN Ambassador and although he had worked to preserve Taiwan’s position at the UN under the Nixon Administration was close to China’s UN representative. He later was posted to China as the American liaison officer, as the US did not have an embassy in China at that time. He spent a year, learning the Chinese culture, its leaders and as he became the President was keen on reviewing and enhancing Sino-American relations. He used the opportunity of attending the funeral of Emperor Hirohito of Japan to justify a trip to China where he met Deng in the first few months of his Presidency. He had developed his friendship with Deng during his tenure as Ronald Reagan’s Vice President and continued that friendship as President. He believed through frank conversations, the Chinese would realize the US’s intentions of developing trust between the two nations.[28]

Elite images of the operational environment in the US changed drastically after Tiananmen. The military crackdown shattered much of the goodwill that had been built through economic reforms by the Chinese in the West. The incident re-iterated in the minds of many that the reforms had been a sham.[29] The view of China being an autocratic dictatorship where human rights were not on the Government’s agenda gained a strong international voice. Even as the Bush Administration attempted to react moderately to the incident in order to not derail Sino-US relations, in the days after Tiananmen as the Chinese leadership began its crackdown on Student Leaders, there was a clamor among the Senate and the Congress for stronger action. Both advocated a radical move against China and many suggested that the US close its Chinese Embassy thereby cutting all formal diplomatic relations with China.

Process:
The Bush administration wanted to send a clear communiqué that the Chinese military crackdown was unacceptable to the Administration, the Congress, the Senate and the American people. But at the same time the Distraction wanted the response to be measured, not wanting to punish the Chinese people for the actions of their government, nor damage tenuous ties with the ruling communists. According to Bush, ‘he believed that the commercial contact between the US and China had helped lead to the quest for more freedom.’ This was the reason behind the Administration not cutting off all ties as Congress was demanding, with China. Instead the Bush Administration suspended military sales and contact with the Chinese Leadership. To President Bush it was important that the Chinese leaders understood that it could not be business as usual until the US saw the PLA restrain itself.[30] According to Bush,” We had to remain involved, engaged with the Chinese government, if we were to have any influence or leverage to work for restraint and cooperation let alone for human rights and democracy. While angry rhetoric might be temporarily satisfying to some, I believed it would deeply hurt our efforts in the long run.”[31]

Bush recognized the fact that the Chinese were extremely sensitive to anything that might appear to be interference in their internal affairs and time again stressed the objections of the American people to the events of Tiananmen as that protests on the grounds of the moral values of the Americans. It was the first nation to announce sanctions against China, which included the suspension of weapon sales, suspension of visits by US and Chinese military and government officials, sympathetic reviews of Chinese students in the US to extend their stay and the offer of humanitarian assistance through the Red Cross to those injured during the assaults.

Despite the clamor for serious sanctions against China pressurizing him domestically and despite his sanctions on the Chinese Leadership, President Bush kept the backdoor channels of communication open. Immediately after Tiananmen, he attempted to speak to Deng directly, but could not get through to him. He kept in contact with the Chinese Ambassador in Washington and finally, going against his own sanction against any visits by government officials, he sent a personal emissary in the form of Brent Scowcroft to Deng, to explain why the US needed to react to what the Chinese assumed were internal matters and how he would be forced to toughen his stance if the Chinese did not relent. Within a matter of a month, the US reacted to the incident, placed sanctions against China and then showed its intent on maintaining ties by sidelining the very sanctions it put in place.

What the model doesn’t let you do:
In the study of China and the United States foreign policies during the Tiananmen Square incident using Michael Brecher’s Framework of Analysis, some flaws in the original framework, do injustice to a number of influential factors. In the study of the psychological environment, the theory leans heavily towards the attitudinal prism of a single decision maker. It also does not take into account within the operational environment the factionalization of a single party authoritarian regime. Both of these missing factors played a key role, in the build up and eventual actions taken by China. Hu Yaobang, Zhao Ziang, Li Peng, CCP Elders Chen Yun, and Peng Zhen’s roles were critical in influencing the decision making processes of Deng Xiaoping. The theory falls into the trap of simplifying the role of the Supreme Leader and his ideologies and does not take into account that the attitudinal prism of other leaders and their factionalization and power play were critical in the decisions that were taken. The demands of one group led by Chen Yun and Peng Zhen who feared that weakening Party control could encourage ideological and social disorder, made Deng step up ideological propaganda. The ideological and power struggle between Zhao and Li were also critical in the decisions taken prior to and post the Tiananmen Square incident.

The flaw in the model is less obvious when using the model to describe the US reaction to the event. While President Bush takes precedence in the decision making process, it is hard to inculcate his “Ex-comm” in the model. It allows one to take into consideration the build up of reactions in the operating environment of pressure groups, competing elites and others, but does not allow for a situation where a newly elected leader is also attempting to make his position within the domestic political sphere stronger. The model also does not allow for the friction within a newly formed team around the leader, which may influence the leader since he belongs to a democratic country which also has a democratic internal set-up.

On an overall basis, I believe that Michael Brecher’s ‘Framework of Analysis’ allows us to observe to a greater extent than most models, the process of decision making. Allowing for the initial separation of the operational environment and its later integration with the psychological environment allows a perspective of how the various facets of a crisis play upon the ultimate decisions and processes. The only flaw in Brecher’s model as I observe is, his heavy tilt towards assuming and playing up the biases of the Leaders and not each of the persons or situations that may tilt the biases of the Leader.







[1] The Foreign Policy System of Israel, Chapter 1 Framework of Analysis, Michael Brecher, Yale University Press, 1972
[2] The Foreign Policy System of Israel, Setting, Images, Process, Michael Brecher, New Haven Yale University Press, 1972
[3] The Foreign Policy System of Israel, Setting, Images, Process, Michael Brecher, New Haven Yale University Press, 1972
[4] The Foreign Policy System of Israel, Setting, Images, Process, Michael Brecher, New Haven Yale University Press, 1972
[5] International Herald Tribune, Gerald Segal, 5/19/1989, pg 4
[6] Chinese Perspectives on International Relations, Gerald Chan, St Martin’s Press, 1999
[7] A World Transformed, George Bush and Brent Scowcroft, Alfred A Knopf, Inc, New York, 1998
[8] Long Live the thought of Mao Zedong, 1967 and 1969, mimeographed volume reproductions
[9] San Jose Mercury News, Yu Bin, pg 11B, 06/09/1989
[10] Christian Science Moniter, Harvey Nelson, pg 19, 06/15/1989
[11] Tiananmen Papers, Zang Liang, Andrew J Nathan and Perry Link, Public Affairs, New York, 2001
[12] International Herald Tribune, Harlan W Jencks, pg 8, 06/21/1989
[13] The Tiananmen Papers, Zang Liang, Andrew J Nathan and Perry Link, Public Affairs, New York, 2001
[14] The Tiananmen Papers, Zang Liang, Andrew J Nathan and Perry Link, Public Affairs, New York, 2001
[15] The Tiananmen Papers, Zang Liang, Andrew J Nathan and Perry Link, Public Affairs, New York, 2001
[16] The Tiananmen Papers, Zang Liang, Andrew J Nathan and Perry Link, Public Affairs, New York, 2001
[17] The Foreign Policy System of Israel, Chapter 1 Framework of Analysis, Michael Brecher, Yale University Press, 1972
[18] The Tiananmen Papers, Zang Liang, Andrew J Nathan and Perry Link, Public Affairs, New York, 2001
[19] A World Transformed, George Bush and Brent Scowcroft, Alfred A Knopf, Inc, New York, 1998
[20] A World Transformed, George Bush and Brent Scowcroft, Alfred A Knopf, Inc, New York, 1998
[21] The Tiananmen Papers, Zang Liang, Andrew J Nathan and Perry Link, Public Affairs, New York, 2001
[22] The Tiananmen Papers, Zang Liang, Andrew J Nathan and Perry Link, Public Affairs, New York, 2001
[23] The Tiananmen Papers, Zang Liang, Andrew J Nathan and Perry Link, Public Affairs, New York, 2001
[24] A World Transformed, George Bush and Brent Scowcroft, Alfred A Knopf, Inc, New York, 1998
[25] A World Transformed, George Bush and Brent Scowcroft, Alfred A Knopf, Inc, New York, 1998
[26] http://www.cia.gov/cia/publications/factbook/geos/us.html#Govt
[27] Beyond Tiananmen: The Politics of US-China Relations, 1989-2000, Robert L Suettinger, Washington: Brookings Institution Press, 2003
[28] http://bushlibrary.tamu.edu/
[29] A World Transformed, George Bush and Brent Scowcroft, Alfred A Knopf, Inc, New York, 1998
[30] A World Transformed, George Bush and Brent Scowcroft, Alfred A Knopf, Inc, New York, 1998
[31] A World Transformed, George Bush and Brent Scowcroft, Alfred A Knopf, Inc, New York, 1998

© All Rights Reserved Maithreyi Seetharaman 2005