CONFIDENTIAL
045063
MDTTAN 20
attach an emotive significance to a deficit with a communist country which will be hard to deflect.
4.
The next step might be for the protectionist Lobby to Look for scapegoats. We note that President Clinton himself, (during his telephone conversation with the Prime Minister on 10 February), pointedly mentioned that a lot of China's exports were financed by Japanese money. The finger could equally point at Hong Kong. Our bullish statistics (eg 70 per cent of foreign capital in South China comes from Hong Kong, 3 million manufacturing workers in South China employed by HK firms), may Look less rosy from the US protectionist end of the telescope.
5. The potentially damaging effects on Hong Kong of non-renewal has always been a strong argument to help persuade the US to renew MFN. The Governor has argued (with good reason), that he will wield more influence as a lobbyist in Washington on MFN if Hong Kong is seen to be making progress towards democracy. Against that there is a risk that Hong Kong's role in China's trade surplus (if the protectionists detect it) may undermine US reserves of goodwill. The protectionist Lobby may ask why the US should care if Hong Kong's economy should suffer by conditional-renewal of MFN. Might there even be a risk that Hong Kong products, (at least those associated with HK companies manufacturing in South China) could come under pressure for protectionist measures? (At the very least, the risks outlined above underline the need for Hong Kong to show itself whiter than white over issues such as textile quota fraud, diversion of strategic materials to China etc.)
6. A number of major US companies, of course, are also contributing to the US/China trade imbalance by virtue of their manufacturing involvement in South China. But neither this, nor arguments about the virtues of free trade, we suspect, would cut much ice with Congressmen susceptible to protectionist rhetoric.
7. It is hard for us to judge from here whether Hong Kong's role in the US/China deficit is likely to play any part in conditional renewal of MFN in 1994. But thus far we have always been able to count on US goodwill towards Hong Kong, and we should welcome your views (and any thoughts from copy addressees) on whether we can continue to do so. Subject to your own views, however, we don't think you should consult the Administration at this stage. If these hares are hibernating at present, we should not start
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