The resumption of full diplomatic relations between the United States and China and resolution of the status of Taiwan may have re-opened the door to trade with China, but another formidable roadblock remains. Still sitting squarely in the path of full normalization is the diversionary and unresolved China claims issue - that is settlement of claims of U.S. citizens against China for property that was expropriated or frozen by the present regime after Chinese assets in the United States were subjected to U.S. Treasury control upon the communist takeover in 1950.
By global monetary standards, the amounts involved are not too great -$197 million in American claims and $76 million in blocked Chinese assets under Treasury control.
But until the claims issue is resolved, any property or funds of mainland China that turn up in the United States (except for China assets already under control) are subject to attachment in the U.S. courts in satisfaction of the claims - and not only by U.S. claimants but perhaps by foreign claimants as well.
This threat of harassment effectively prevents direct shipping, commercial and banking links between China and the United States (though not transactions effected indirectly through Hong Kong and Japan).China refuses to allow entry of U.S.-flag vessels into China or establishment of U.S. branches on the mainland without the reciprocal right for China in the United States, including immunity of assets from claimants.
If the claims-blocked assets issue were settled, however, U.S. claimants would be confined to a settlement fund for satisfaction of their claims. Thereafter, all attempts by claimants to use the U.S. courts to attach Chinese vessels, bank accounts or other assets in the United States would be subject to dismissal.
In principle there ought to be few obstacles to removal of the claims road-block. The United States and China agreed in 1973 to make asettlement of the claims a matter of first priority, and in theory all parties are in favor of an agreement. Pursuant to legislation passed in 1966, the U.S. Foreign Claims Settlement Commission has already sorted out and adjudicated all U.S. claims, thus drastically shortening the settlement process. Nevertheless, the route to settlement will not be a smooth one.
The principal obstacle is bound to be domestic U.S. political opposition from remnants of the old "China lobby" and other opponents of normalization. They are likely to demand full cash settlement for the claims. That would certainly be rejected by China, both for political reasons and for their paucity of foreign exchange.
The most satisfactory approach to the problem would be to use the so-called Litvinov Assignment as a model. Derived from the 1933 settlement of U.S. claims against Russia, this formula would call for assignment by China to the United States of title to the blocked assets - which would then be used to pay off the U.S. claimants. This method not only obviates the necessity of a lump-sum payment to claimants by China but also eliminates the need for a formal agreement.
For the assisgnment method to be workable, the gap in dollar amounts between claims and the blocked assets available to satisfy them cannot be too great. Right now, $120 million of the $197 million in claims consists of 14 claims of over $500,000 held by corporations, the largest begin a $53 million claim by Boise Cascade. They remaining $77 million is held by religious and non-profit institutions and private individuals. Sale of the assets would provide an across-the-board payment of 40 cents on the dollar - a superficially equitable solution except that prior tax write-offs would give many corporate claimants a windfall. If interest on the claims were also allowed - and made retroactive as periodically suggested - it would give these corporate claimants a bonanza.
Indeed, demands for excessive interest on the claims may well be suggested in order to kill the whole deal: If back-dated to 1950, the total of claims plus interest would reach $400 million, creating such a disparity between claims and assets as to make the assignment method unworkable.
A solution along Litvinov Assignment lines is now within reach that could conceivably pay off small claims-holders in full and religious and non-profit holders at 60 percent. A Nov. 14 order by the Treasury Department, which required banks and other custodians of the blocked assets to henceforth pay interest on them, should raise the value of the blocked assets to well above $80 million by the time of settlement. But this settlement formula will require the scaling down of corporate claims to take account of tax write-offs and under no circumstances allowing interest on the claims.
Secretary of the Treasury W. Michael Blumenthal and Commerce Secretary Juanita Kreps are scheduled to visit China in February to negotiate commercial agreements. If the full potential of recognition is to be achieved, the attainment of a satisfactory claim-settlement formula ought to take high priority.