Most-Favored-Nation Status and China: An Economic Analysis of Linkage

Abstract

This paper examines the effectiveness of linking China's most-favored-nation (MFN) status to economic, foreign-policy, and human-rights issues. It calculates the Sino-U.S. trade balance and reviews two studies on the economic impact of suspending China's MFN status, arguing that loss of MFN would have a major impact on the Chinese economy and a smaller but significant effect on the U.S. economy. The paper examines efforts to link China's MFN status to other issues and concludes that MFN has been most effective in securing economic concessions, less effective in achieving foreign-policy objectives, and only marginally effective in securing human rights. The paper argues that the absolute costs to the United States of MFN suspension politically outweigh the larger relative costs to China, limiting the credibility of threats to suspend China's MFN status. Instead of relying on MFN as a policy instrument, the United States should develop a more selective set of sanctions to pressure China on economic, foreign-policy, and human-rights issues.