Testimony

Of

Michael A. Santoro, J.D., Ph.D.

Assistant Professor

Rutgers, The State University of New Jersey

Graduate School of Management

111 Washington Street

Newark, New Jersey 07102

973-353-5121

March 23, 2000

United States Senate

Committee on Finance

As do many Americans, I am deeply concerned about human rights conditions in China. Although I support granting PNTR to China, I do not support, apologize for, or justify the human rights record of the Chinese government. The authoritarian government of China regularly and systematically abuses the human rights of its people. It is a well-documented fact that the Communist Party punishes individuals for doing nothing more than expressing their political opinions or practicing their religious beliefs.

I have spent almost a decade researching the moral and foreign policy implications of human rights in China. I have made numerous trips to China to research these issues and in particular the impact of foreign corporations upon human rights conditions and democratization in China. The results of my academic research are reported in my book Profits and Principles: Global Capitalism and Human Rights in China. In this testimony I will draw from the findings presented in my book. Before doing so, however, I want to clarify some general moral principles applicable to the subject of human rights in China.

I am not a moral or cultural relativist. I believe that the frequency and severity in which the Chinese government suppresses religious and political expression offends the basic human rights and dignity of its people in such a way as to require the rest of the world, including the United States, to take notice and take action. Such human rights abuses cannot be excused on the grounds that China has different cultural values than the West, or because it is a relatively poor, developing nation, or because of the perceived potential for political instability. In my view none of these reasons which are often invoked by the Chinese government constitute a valid justification for the human rights abuses taking place in China.

International law principles of state sovereignty do not prohibit foreigners from attempting to affect human rights conditions within China. On the contrary, I believe that Americans and other foreigners can and should do something about human rights abuses within China. The relevant moral questions are which foreigners have human rights duties and what these duties are. The "fair share" theory of moral responsibility for human rights that I outline in Profits and Principles provides principles for answering these questions and I will be drawing on those principles in this testimony.

The first and most obvious positive influence of trade upon democratization in China is economic. Some argue that trading with China helps to support a corrupt regime. In fact, the opposite is true. Since the time of Aristotle political scientists have contended that democracy is much more likely to be sustainable when a country’s people have achieved a certain level of economic development. The modern articulation of this idea is credited to the political scientist Seymour Martin Lipset. More recently, political scientists and economists have confirmed that, while there are isolated exceptions (most notably India), economic prosperity generally is a precondition for a stable and sustainable democracy.

The recent Taiwan presidential election perhaps offers the best illustration of the relationship between economic development and democratization. Following several decades of strong economic development and the emergence of a strong middle class, The Taiwanese people demanded and received in the late 1980s and early 1990s a greater role in the rule of their country and increasingly open and free elections. The 2000 presidential election featured 82% voter turnout, further proof that democratization follows economic development. Surely, Chinese citizens and leaders are aware of the thriving democracy in existing in Taiwan today and understand that as their own country becomes more prosperous the possibilities for democracy increase.

Although serious and widespread poverty still exists in China, particularly in rural areas, average per capita income is approaching $3,000 in terms of purchasing power parity, making China "middle income" according to the World Bank, and is fast approaching levels that would help to sustain a democracy. By helping China to develop economically, American trade and investment is thus helping to create a middle class with power and interests independent of the state. Granting PNTR to China will accelerate this economic growth and thereby help to create a fertile ground in which the seeds of democracy can take deep root.

Foreign trade and investment in China are not only helping to create prosperity in China. More importantly, they are doing so in the private sector according to private sector rules. By hiring, firing and promoting on the basis of merit, multinational corporations have two kinds of impacts on Chinese society. First, they are helping to teach their workers that individual merit and talent matter. Second, this emphasis on individual worth is helping to create a "meritocracy cadre"--a well-heeled and highly educated social class with power and interests separate and distinct from those of the state.

For decades, the traditional path to power and wealth in China has been to join the Communist Party, to work for a state-owned enterprise, and to establish good relations with superiors. Being well connected to the party and literally knowing and professing the "party line" has been the most important key to career success. Multinational corporations are helping to break down this equation in dramatic ways. They are helping to create a whole new "meritocracy cadre" of Chinese citizens who are acquiring wealth status and power through individual merit and hard work rather than through connections to the Party.

One member of this new meritocracy cadre is "Tom." Tom is an engineer by training but has risen rapidly through the ranks of his American company in China. Upon introducing himself, Tom is careful to note that his Ph.D. in theoretical physics from a prestigious Chinese university was earned with honors. My first impression of Tom was that he was a bit egotistical as he told me of his various credentials and accomplishments. After a while, however, I began to understand that the reason Tom touts his credentials is that he is proud of achieving his position on the basis of his talents rather than through personal connections. Tom is very careful to contrast his own career with that of his father, who was, according to Tom, a "number one boss" at a factory in Hebei county outside of Beijing. Tom’s father rose to his position largely as a reward for being a People’s Liberation Army soldier at the time of the founding of the People’s Republic of China in 1949. Tom, however, is eager to be judged by his technical and business acumen.

Another member of this new "meritocracy cadre" is "Ling," a business strategist for an American company. Originally from China’s Northwest, Ling went to college in Shanghai and landed a job at an American company in Northeast China after spending several unhappy years working at a state-owned enterprise. Ling told me that in her American company "as long as you perform, you will get promoted. SOEs are large and old. You are behind a lot of people for a promotion."

For young, educated Chinese men and women, working at a foreign company, especially an American company, is the most desirable job they can get. As a result, American companies are attracting the "best and the brightest" of Chinese society, those who are most likely to influence political and social change in the coming decades. Arguably, as they acquire wealth and status, the members of this meritocracy will be in a more advantageous position than are current dissidents, mostly intellectuals and students, to influence the future direction of China. The opportunity to make money, to be promoted, and to achieve on the basis of individual merit are far greater in foreign companies than within traditional state owned enterprises.

The opportunity to have a successful career in an American company has ripple effects throughout the Chinese educational system. In China today, the MBA is replacing membership in the Communist Party for young, talented and ambitious men and women. As "Louisa," a Shanghai-based employee of an international consulting company observed, "simply knowing I would have that opportunity to find a job with a ‘politically’ insensitive’ multinational helped me to act more like an individual in college."

Foreign companies are not paying Chinese workers according to merit in order to advance human rights or democracy. They are doing so because it makes good business sense. Companies that are not able to attract and retain talented workers won’t be in business very long. This is as true in Beijing or Shanghai as it is in Silicon Valley or Wall Street. This is how the free market works. As Chinese workers learn the lessons of the free market they are also learning an important lesson about human rights and democracy. Once you have gotten used to the idea on the job that you deserve to be treated justly and on the merits, you are not likely to tolerate arbitrary treatment from the government in other aspects of your life.

A time will come in China when the self-made men and women who have risen as entrepreneurs and employees in foreign-based corporations will occupy social and political space uneasily with managers of SOEs who have acquired their positions through the old guanxi or personal connections system. These self-made men and women are likely to have little patience for the shortcomings of those who have achieved material well being and power by demonstrating loyalty to the Communist Party line. By providing an alternative avenue for social and economic mobility, multinational corporations in China are helping to create a middle class meritocracy with interests and ideas that are quite distinct from those of the Chinese state. Granting PNTR will accelerate and enlarge the development of a middle class meritocracy and thereby contribute to China’s democratization.

American corporations are helping to redefine power relationships within China. Within the context of Chinese society, many of the most basic tenets of contemporary management theory and practice are inherently radical influences. In the traditional Chinese cultural pattern, the good subordinate obeys and respects the boss. The boss gives orders and makes decisions. The boss looks after the subordinate. More conversation, conflict, challenging of authority, and shared decision-making takes place between boss and subordinate in contemporary western management practice. This is how Louisa, the Shanghai-based consultant, describes the difference between working in a Chinese company and in an American company: "Relationships between colleagues and bosses are much better in American companies. Here, I can really open up and act on my opinions. The open environment allows me to be creative and work according to my instincts….Right now, my boss is driving me crazy. I can also tell her she doesn’t make any sense when she’s wrong about things. This is because the environment in American companies is more open. You make friends with your bosses; you don’t simply fear them. Everyone is equal." Another young woman working for a European company in Shanghai told me that "we learn….to speak out and say what we think."

Time after time when I asked workers in China what it took to succeed in a foreign corporation, I got the same reply, "attitude"—the willingness to learn how to do things differently. One young woman said that foreign companies require you to "take full responsibility’ and "think differently." Ultimately, the most radical notion foreign corporations introduce in China may be the importance of change itself. To thrive, the contemporary corporation must continually reinvent and re-engineer itself. As a Hong Kong American executive in charge or regional training in Asia told me, "we change a lot and we change very quickly. We don’t do things the same every time. We improve. We bring people in and out on assignments. We’re not focused on the past. We value open and direct communication." The company for which this woman works is, of course, interested in profits, not politics, but receptivity to change is an idea that can’t be confined to the workplace. As Chinese workers in foreign companies assimilate such values they are bound to spill over into the broader society.

Multinational firms in China also promote human rights and democratization by stressing the importance of information sharing and teamwork. Corporations encourage such behaviors because they are essential to optimal decision-making and operational effectiveness, but teamwork and information sharing are hard to confine to the workplace. By teaching the importance of these ideas in a corporate context, foreign corporations in China are helping to put in place values and practices that in the long run can help to promote human rights and sustain democracy.

The modern corporation thrives on the free flow of information up, down and across organizational structures. In addition to sharing information freely, workers in the modern corporation must work cooperatively to solve complex problems in teams drawn from diverse parts of the organization. Companies that hope to maximize their profits must design their organizations and train their workers to share information and work together in teams. One of the prime reasons for the resurgence of American business in the 1990s was the massive investment that companies made in new information technologies, including telecommunications equipment and computer hardware and software. Among other things, this investment in technology has made possible the sharing of information among workers within an organization and with workers in other organizations. The emergence of the Internet and the development of communications technology are each day it seems creating new and thrilling new business paradigms. As a result of this technological quantum leap, the ante has risen sharply for companies that want to compete in the global economy. Sharing information throughout an entire network of organizations has become an indispensable key to survival. The Internet has made it possible to share information instantaneously and globally. In China, however, the notion of speedy and open access to information is a radical concept that poses a threat to the power of the Communist Party, which throughout the history of modern China has maintained social control by controlling information.

For Western companies, it is critical that Chinese workers learn to practice teamwork and share information on the job. Wall’s, the ice cream subsidiary of U.K.-based Unilever, offers a good example of how teamwork and information sharing can affect the bottom line. Shortly after going to China, Wall’s general manager for China dispatched a cross functional team to cut the costs of a particular product whose costs, he thought, were getting out of line. He was rewarded with a 10 percent cost reduction without loss of quality. To accomplish the general manager’s assignment, Wall’s workers had to trust one another, work together, share information, and think creatively about re-engineering a product. These are among the trendiest ideas in modern management science. Any firm not practicing them is not likely to be competitive for very long. Information sharing, trust and teamwork are also, however, the hallmarks of a healthy democracy. In the same way that information sharing is essential to good decision-making and operational effectiveness in a corporation, free speech is essential to good decision-making in a democracy. It is hard to imagine that ideas about the importance of information flow can be confined to corporate life. Inevitably, those who work in foreign corporations and have gotten used to the free flow of economic information will wonder why their government restricts the flow of political information.

In addition to introducing ideas about information flow within their organizations, foreign corporations are pressing the Chinese government toward greater legal and regulatory transparency. As recently as five years ago, foreign businesses were complaining that China’s commercial laws were too inaccessible. Today, China’s Ministry of Foreign Trade and Economic Cooperation has a website that contains up-to-date text of national laws and regulations affecting business. Moreover, the efforts of multinational corporations to increase the flow of information within and outside of their organizations complement other trends in China. Although official news outlets are still tightly controlled, the proliferation of private publications, the fax machine, the Internet, and foreign travel have all made it more and more difficult to control the flow of information within China. Granting China PNTR will accelerate and heighten this trend toward more open flow of ideas and information.

Even after two decades of economic reform and foreign investment, less than 1 percent of the Chinese labor force is employed in foreign invested enterprises. It is important to emphasize, however, that foreign-invested enterprises, along with private companies, are the fastest growing segments of Chinese society. In time, therefore, the impact of "human rights spin-off" will grow. As Figure A illustrates, the demographic changes going in China today are causing seismic shifts in the Chinese urban economy. The opportunities being created by the free market and foreign trade are persuading an entire generation of young Chinese workers to reject the bland security of working in state-owned enterprises and to work in private enterprises. The most daring among them are starting their own companies. They are in the process learning that they can create their own wealth and acquire social status on their own. If present demographic trends continue, these self-made men and women, along with the men and women who work in Western companies, will grow to outnumber those who have followed the traditional path to wealth and power in China through Communist Party membership. Granting PNTR to China will solidify and accelerate these well-established demographic trends.

Source: China Statistical Yearbook, China Statistical Bureau, 1998. The values for the years 2000, 2005, and 2010 are projections, based on the assumption that the growth rate of the previous three years (1994 through 1997) continues.

To compete with the foreign competition that will be unleashed by the World Trade Organization, Chinese state-owned companies will have to reinvent themselves in ways more profound than simply paying bonuses for superior performances. Take, for example, the way information is transmitted within SOEs. A few years ago, I was giving a lecture to a group of middle managers at a large SOE in Beijing. On my way to the lecture I picked up and read a copy of the Asian Wall Street Journal. The front page featured an article describing this company’s plans to sell shares in the United States stock market. When I mentioned the article during the lecture I was stunned to learn that none of the managers were aware of the news, even though many of them had jobs and responsibilities that would be profoundly affected by the possibilities being discussed in the article. My little story is meant to make a larger point that SOEs are going to have a lot of trouble competing with foreign companies after China enters the WTO unless they adopt the very best Western management practices. Admittedly, at this point there is little hard evidence that SOEs will change to become more like their Western counterparts. However, the trend would appear to be inevitable. At first, SOEs will, as we are seeing, pick the most obvious practices, such as performance pay, from the Western management toolkit. Eventually, however, they will come to realize that to compete against foreign companies they will have to adopt and integrate up-to-date information technologies and to train their workers to use these technologies. They will also have to consider some of the "softer" management practices that complement these information technologies and perhaps adopt less hierarchical organizational structures that allow subordinates to exercise greater initiative and independence. If these kinds of changes do begin to happen within SOEs then this will constitute a kind of "multiplier effect" for the human rights spin-off effects emanating from foreign forms operating in China. Granting PNTR to China will help to unleash this multiplier effect.

The WTO agreement presents Congress and the American people an historic choice over the future of relations with China. There are numerous "national interests" at stake in this decision. One of those national interests is our cherished commitment to the values of democracy and human rights. A foreign policy that does not advance our interests in democracy and human rights will not receive the support of the American people and will not be sustainable in the long run. Ratifying the World Trade Organization agreement with China and granting it permanent normal trading relations advances America’s interest in promoting human rights and democratic values. Doing so will accelerate the "human rights spin-off" phenomenon. As China opens itself more and more to the outside world, its society will inevitably change as a result of the contacts with foreigners. Indeed business people constitute by far the single most important foreign source of social change within China. As I have describe here and in greater depth in my book, many of these changes have important positive implications for democracy and human rights. Granting China PNTR will accelerate these social changes. Ultimately these social changes will pose a formidable challenge to China’s government, as profound contradictions emerge between the Communist Party’s authoritarian rule and China’s increasingly free economy and society being created by private enterprise and the free market.

In recent years, political and religious repression within China has increased. In 1999 the government has arrested thousands of members of the religious group Falun Gong. Repression of Christian groups continues, as does the jailing of political dissidents who dare to speak out in favor of democracy and human rights. Some argue that because of this stepped up repression China should not be granted PNTR. This view is mistaken because it fails to appreciate how it is that trade contributes to democracy and human rights in China.

It would, I believe, be a big mistake to return to a policy of attempting to push China toward democracy and human rights by threatening trade sanctions. It is true that without any credible threat of trade sanctions, China’s leaders have felt emboldened to step up political repression of political and religious dissidents. But the flip side of the coin is that the exposure to foreign ideas made possible by foreign trade is also helping to embolden Chinese citizens to speak out and exercise their civil and political liberties. Thus, the short-term effect of increased trade with China will be that the number of dissidents will increase and the government will feel more latitude to repress those dissidents. Ironically, therefore, the recent increase in political repression in China is an indication that engagement is working. As time goes by, the winds of change brought on by China’s entry into the WTO will encourage even more voices of freedom.

Unfortunately, The United States cannot credibly threaten economic sanctions and simultaneously trade freely with China. At this point, with the positive effects of economic engagement so apparent, the wisest course for the United States is to grant PNTR to China and to find other ways to put pressure on the government to release political and religious dissidents. This is why in my book Profits and Principles I call for the United States to follow a policy that I call "comprehensive engagement plus." At the same time that the United States trades with China, American leaders must not be afraid to speak out and criticize the authoritarian actions of China’s government. It is especially important that the United States and other countries press the criticism of China in international forums such as the Human Rights Commission. It will require a subtle balancing, which one American newspaper likened to the traditional Asian balancing of Yin and Yang, to trade freely with China and at the same time be critical of its human rights practices. But public condemnation will complement and help to support the social changes already occurring within China. Brewer Stone, an American businessman with longstanding ties to China, put it aptly when he said that "constant and repeated criticism by foreign leaders will have an effect. It can simply drive home the point that China is not living up to its own stated ideals, and in the end most people find themselves uncomfortable with hypocrisy."

Before concluding my testimony, I would like to comment on the suggestion made by some that the United States should not grant PNTR to China because of labor rights abuses in manufacturing operations there. This "sweatshop" problem in China and other developing nations is a complex issue which I address in some detail in my book Profits and Principles. Despite the complexity of the issue, I would like to offer a few general observations about the problem here and to suggest how, in light of the nature of the problem, granting PNTR to China can be a positive force for labor rights in China and elsewhere.

The positive "human rights spin-off" thus far described in this testimony results from the profit-maximizing behavior of "market-building" multinational corporations that enter China in the hopes of capturing consumer and business markets. These companies, such as Motorola and General Motors, are world class firms that are investing often huge sums of capital in China, paying wages far above the norm, and offering a high quality working environment for their mostly young, skilled and educated workforces. These companies are committed to long-term strategies in China. In my book, I identify another business strategy employed by firms in China that I call "cost-minimization." This strategy describes companies that are primarily attracted to China because of its bountiful supply of low-skilled, low-wage labor. Such "cost-minimizing" firms are likely to be global marketing companies who usually have little physical presence and direct investment within China. The goods manufactured by cost-minimizing firms are those which require low-skills such as toys, clothing, and basic electronics.

Subcontractors who perform work to the specifications of global marketing companies usually conduct the manufacturing operations for cost-minimizing firms. Competition among developing countries to attract this kind of investment is keen and the workers who are drawn to these jobs are likely to be migrants from rural areas who possess little education. Local governments are often lax in enforcing existing labor regulation because manufacturers can easily shift their operations to more compliant locales whose governments turn a blind eye to labor abuses. Corruption and conflicts of interest involving local officials also contribute to the lax enforcement problem. As I outline in my book, the economic incentives at work in these circumstances and the vulnerability of the workers create the potential for severe worker abuses.

Although there is little systematically gathered evidence of the incidence and severity of such abuses in China and other developing nations, credible reports by journalists and non-governmental organizations (NGOs) suggest that the sweatshop problem is a serious one. Compounding the problem are reports that the subcontractors of well-known global retailing firms employ children and prison labor.

The "fair share" theory of human rights responsibility that I develop in my book leaves no room for doubt that global marketing companies have a moral duty to assure by any means necessary that the manufacturing facilities operated by their subcontractors do not violate the human rights of the workers employed in those facilities. In recent years, NGOs have employed negative publicity campaigns successfully to pressure companies with well known brand names or affiliations with celebrities (particularly in the apparel industry) into assuming increasing responsibility for the labor conditions in factories operated by their subcontractors. Students at prestigious schools such as Rutgers, Duke, Oberlin, Notre Dame, Brown, and North Carolina have joined the anti-sweatshop campaign. With the support of concerned administrators from these schools, these students have pressured manufacturers of licensed collegiate apparel to exercise greater oversight over their subcontractors. More recently, elaborate international systems of factory monitoring and certification have emerged. Among the most notable of these are Social Accountability 8000, the Fair Labor Association, and the Workers Rights Consortium.

As I describe in my book, a number of factors complicate and stand in the way of a satisfactory resolution to the international sweatshop problem. Among these factors are: the relative indifference of most consumers in developed nations about human rights abuses in developing countries; free-rider problems resulting from the essentially voluntary nature of compliance with existing and proposed certification schemes; confusion resulting from the proliferation of certifications schemes and compliance marks; and the lack of consensus over the minimal standards for certification, exemplified by the ongoing debate over the meaning and applicability of a "living wage" standard.

Not surprisingly, the lack of progress thus far on the sweatshop problem has led some to call for an intergovernmental solution in the form of the introduction of a "labor clause" in the WTO. Last year, the WTO ministerial meeting in Seattle was disrupted as a result of protests which in part sought to promote such a labor clause. To this point, there has been no indication that developing countries such as China will embrace such a labor clause which they regard, incorrectly in my view, as being a protectionist infringement of their sovereignty and contrary to their economic interests.

Within developed countries such as the United States, some have seized upon the labor clause issue as a basis to oppose free trade generally and, in particular, China’s entry into the WTO. In my view, this position is flawed. The position is, in part, premised upon the overly-optimistic view that a WTO-enforced labor clause will result in the return of low-skilled manufacturing jobs to the United States. In fact, the difference in manufacturing costs between less developed countries and the United States is so great that it is highly unlikely that any labor rights clause that could achieve international consensus would result in the return of manufacturing jobs to the United States. This misplaced emphasis on protectionism is a dangerous diversion from the educational initiatives that are necessary to prepare American workers to compete in the global economy of the 21^st century. Workers who lose their jobs as a result of the trend toward global markets and manufacturing need training which enables them to assume better paying, higher skilled jobs in the new economy, not the false promise offered by protectionism.

China’s accession to the WTO could actually serve to hasten the potential for an intergovernmental solution to the sweatshop problem. I believe that once it becomes a member of the WTO, China, along with other developing nations, will in time come to realize that its workers would gain economic benefits from an intergovernmental labor standard enforceable by the WTO. In this way, workers in developing nations will be able to capture more of the economic benefits of globalization currently lost in the "race to the bottom" engendered by the competition over limited foreign investment dollars. It would be overstating it to suggest that granting PNTR to China will by itself solve the global sweatshop problem. It may, however, hasten the time when it is feasible to achieve an intergovernmental solution making sweatshops a thing of the past and assuring that enforceable, humane minimum labor standards will govern manufacturing operations throughout the world.

America is at a crossroads in its relationship with China. There are many national interests at stake in the vote over granting PNTR to China. America’s interest in democracy and human rights is as important as any of these interests. As I have tried to show in this testimony, granting PNTR is the most effective way to promote America’s interest in promoting the emergence in China of a stable democracy that respects the human rights of its citizens.

Thank you for the opportunity to express my views.