U.S.-CHINA SECURITY REVIEW COMMISSION

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U.S.-CHINA CURRENT TRADE AND
INVESTMENT POLICIES AND THEIR IMPACT
ON THE U.S. ECONOMY

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PUBLIC HEARING

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Thursday

June 14, 2001

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The Commission met in Room 124, Dirksen Senate Office Building, Washington, D.C., at 9:00 a.m., James R. Lilley and Patrick A. Mulloy, Hearing Co-Chairs, presiding.


PRESENT:

JAMES R. LILLEY Hearing Co-Chair
PATRICK A. MULLOY Hearing Co-Chair
C. RICHARD D'AMATO Commission Chairman
MICHAEL LEDEEN Commission Vice-Chairman
GEORGE BECKER Commissioner
STEPHEN D. BRYEN Commissioner
JUNE TEUFEL DREYER Commissioner
KENNETH LEWIS Commissioner
WILLIAM A. REINSCH Commissioner
ROGER W. ROBINSON, JR. Commissioner
MICHAEL R. WESSEL Commissioner


I-N-D-E-X


Witnesses Testifying

Senator Robert C. Byrd 6
Senator Fred Thompson 18
Senator Paul S. Sarbanes 30
Senator Chuck Hagel 41


Current U.S.-China Trade and Investment Policies:
Impact on the U.S. Economy

Richard L. Trumka 55
Gary Benanav 64
Robert A. Kapp 73


China PNTR and WTO Issues

The Honorable Charlene Barshefsky 143
The Honorable Joseph W. Prueher 152


Trade Relations Between U.S./China and
China/Taiwan: Implications for U.S. Economy

William Wolman 217
Anne Colamosca 220
Kevin L. Kearns 226
Jerome Cohen 236
Rupert J. Hammond-Chambers 250

P-R-O-C-E-E-D-I-N-G-S
CHAIRMAN D'AMATO: Good morning. This is the opening hearing of the newly formed U.S.-China Commission, which is a statutory permanent Congressional advisory body. We're privileged to have before us as our first witness today the distinguished Chairman of the Appropriations Committee, the President Pro Tem of the Senate, Senator Robert C. Byrd.
This Commission, which was created by legislation authored by Senator Byrd, together with a number of other senators, including those who will be following Senator Byrd in their presentations this morning. The statute was passed on the Defense Authorization Bill, and its purpose of which is to conduct an integrated assessment of the U.S.-China relationship by investigating the relationships between our mushrooming economic flows and U.S. national security concerns.
In the past, efforts have been made to keep economic ties to some extent compartmentalized from overall relationship, but with China now becoming America's primary international protagonist and with America's focus shifting away from Europe and to the Pacific as our primary region of interest in the new century, all parts of the relationship are increasingly being related to each other.
China's position towards it's neighbors, U.S. allies and friends, its military and political policies toward the U.S. will increasingly be affected by, and in turn will affect, the kind and size of our economic relationship.
The Commission is therefore approaching an understanding of the China connection in a newly comprehensive fashion. This Commission is seeking to fulfill its wide-ranging Congressional mandate and develop and fresh and holistic approach that makes sense regarding China and to understand the implications of the huge flow of economic resources going from the United States to the Chinese economy and government.
These resources take the form of very large trade surpluses, steeply growing sums of venture capital from our financial marketplace, and increasingly large investments by U.S. businesses. This also involves substantial transfers of advance technology.
We have scheduled three other hearings prior to the Congressional recess in August, including hearings on capital markets, on a wide range of specific sectors and on mutual perceptions in the security arena.
The Commission is required to provide a comprehensive annual report to the Congress in March of each year, in classified and unclassified forms, together with any recommendations for legislation and other actions as the Commission feels appropriate.
To help us sort out these questions we have a series of presentations by several senators who are involved in the creation of this Commission, followed by representatives of business and labor and former officials of the Executive Branch, including Admiral Joe Prueher, our outgoing Ambassador to China; and our former trade negotiator in the past administration, Ambassador Charlene Barshefsky.
Senator Byrd, we welcome you today and it's an honor to hear from you.

SENATOR BYRD: Thank you, Mr. Chairman, members of the Commission. I am pleased to participate in the initial hearing, the initial public hearing.
In your ongoing investigation of the U.S.-China trade and security relationship you have a very special responsibility and a unique opportunity to provide fresh insight into this key dimension of U.S. foreign policy. For the foreseeable future the People's Republic of China presents us with our most important and delicate foreign challenge. This is evident from at least two widely recognized phenomena.
First, with the end of the Cold War America, which continues to define its geo-political interests globally, is increasingly focusing its security resources on the Pacific Region. This focus is likely to come into conflict with China's regional ambitions. Indeed we are a long way from the days when China's leaders took seriously the Maoist slogan "Seek no foreign entanglements."
Second, China has enormous, untapped economic resources under huge and complicated trade and investment relationship with the United States. In short, both countries face a complex array of bilateral opportunities and bilateral dangers. It would be a mistake to over simplify this situation by failing to recognize the interdependence between the economic and national security htmects of the relationship.
The task of the Commission is further complicated by the significance of a host of questions that may not be answered with perfect precision. I will cite just four:
First, to what extent is China's security apparatus involved in normal commercial transactions between Chinese and Western companies?
Second, how does any such involvement help the Chinese Communist Party to maintain its monopoly on political power?
Third, how will technology, especially communications technology, affect that monopoly?
Finally, in what way will internal political changes affect China's external orientation, especially it's regional, geo-political ambitions?
As each of you uses your historical knowledge and analytical expertise to sort through these issues, and as you develop your collective judgment about the myriad htmects of the U.S. China relationship, your load stone must always be the evolving long-term national security interests of the United States.
I know that you're conclusions will help to guide Congress as it discharges its responsibilities under Article I of the Constitution. To regulate commerce with foreign nations; two, define and punish offense against the law of nations; and three, make rules for the government and regulation of the land and naval forces.
You, as members of the Commission, must apply your best judgment to issues that will often be difficult to precisely evaluate. As Aristotle pointed out in his Nicomechian ethics, and I quote: "Our discussion will be adequate if it has as much clearness as the subject matter admits of, for precision is not to be sought for a like in all discussions anymore than in all products of the crafts."
Now, fine and just actions which political science investigates, admit of much variety and fluctuation of opinion. We must be content then in speaking of such subjects and with such premises, to indicate the truth roughly and in outline, and in speaking about things which are only for the most part true and with premises of the same kind to reach conclusions that are no better.
Mr. Chairman, the statutory mandate that you have been given is intentionally broad. Little of importance has been left off the table, and you have been given the time and the resources to explore all productive avenues of inquiry. You must develop a full understanding of the complexities surrounding the transfer of economic resources from America to China, including the huge annual surpluses on China's trade account and the mushrooming infusions of U.S. capital onto Chinese soil.
An evaluation of this transfer of economic resources should include the impact on China's economic and political systems, its strategic planning, its military build up, and its regional behavior.
An assessment of the overall affect of the transfer of resources on the long-term security interests of the United States, particularly focusing on the U.S. role in supporting peace and stability in the Pacific Region, is what we are after.
In addition, your report must include a full investigation of China's acquisition of U.S. dual use and military technology. I believe that China is concentrating on technology acquisition from the United States and the West in lieu of fully marshalling its own domestic efforts in support of research and development.
Aside from the direct acquisition of technology by contract and government imposed offset requirements, China is utilizing the People's Liberation Army and Defense Ministry owned front companies operating in the United States to procure advanced dual use and military technology such as high performance computers and navigation and communications equipment. Some sources estimate that there are as many as 3,000 Chinese Government front companies operating in the United States.
Our need is for the Commission to provide us with quantitative and qualitative analyses of these trends, as well as your suggestions concerning appropriate policy responses. Are our current approaches to export control vis-a-vis China achieving our objectives? Should we develop new unilateral or a multi-laterally export control approaches? Are we devoting the necessary resources to this task?
We must try to view our relationship with China as a complex totality with economic, military, societal and environmental components. On climate change, for example, a topic of immense importance to the United States and to the world, China's refusal thus far to become a part of the Kyoto negotiations was a major factor in leading me to the conclusion that the then current version of the Kyoto protocol was flawed and unworkable. That's why I authored, along with Senator Hegel, the resolution. Resolution No. 98 I believe it was, passed the Senate, adopted by the Senate by a vote of 95 to 0.
The Chinese are second in the world in greenhouse gas emissions and are expected to become the world's leader in 2015. The Chinese must not walk away from their responsibility to become part of the solution to the global climate change problems of which they are a part.
As I have said in another context and in another forum, China is an industrial behemoth and must be regarded as such. We must not permit China to hide behind a developing national moniker. We have to wish to put a lid on China's economic future, yet we're all inhabitants of this planet and its environment must be protected by all of us for all of us.
On the trade side there are many bilateral and multi-lateral issues that the Commission will need to consider, but let it suffice for me to say that the Chinese leadership has an unfortunate tendency to refuse to abide by the understandings that have long formed the basis of America's bilateral trade relationships.
Now that China has come to an agreement with the United States on the terms and conditions of this accession to the World Trade Organization we must be alert to any return to China's most objectionable practices, such as export subsidization and predatory dumping.
Finally, it seems clear that the Chinese regime is testing the metal of this administration on the security side. Here we may face real danger insofar as the Chinese miscalculate American resolve to protect our interests and demand adherence to commitment, particularly in relation to Taiwan. Miscalculation must be avoided or at least minimized through threat reduction mechanisms and institutions such as those we put into place over several decades in our relations with the former Soviet Union.
The Chinese have written openly about new forms of warfare, such as information and cyber warfare, that they feel could serve to offset the United States' military and strategic advantages. The mandate of this Commission, Mr. Chairman, includes a requirement to examine China's intentions and programs in this area. The incident with our EP-3 reconnaissance plane, while disturbing and unfortunate, had the sanitary benefit of putting to rest the view that U.S.-China trade issues can be neatly separated from U.S.-China security issues.
The American public now understands, if it did not already understand, that China is engaged in a concentrated effort to acquire U.S. military and dual use technologies and that China's commercial relations must be consisted as part of this effort.
The Commission would serve our country, and the United States Senate, well if the Commission would determine:
One, the magnitude of the economic and military resources China has accumulated through trade and investment flows with the West; and two, the extent to which those resources are being presently used and China's future plans for that use over the next generation to challenge U.S. interests and policies in the Pacific Region.
This analysis should include details on the types of military useful technologies that the Chinese are acquiring and the strategic objectives that drive such acquisitions.
The Commission's first required report is due next March. In the interim period, however, if events arise that in your judgment compel an interim report, I and I'm sure my colleagues on both sides of the aisle who support this Commission through the action by the Senate on the resolution, I would urge you to communicate this need to the Senate leadership and to appropriate Congressional committees of which the committee which I chair is one.
I see from your hearing schedule today that you have included influential officials from the last administration, such as Ambassador Barshefsky and Ambassador Prueher, and I understand that you're inviting a wide range of officials from the current administration for your hearings this summer, along with a variety of experts from the business, labor and academic communities. Congress will surely benefit from your effort to take in the widest possible range of views and information.
In sum I would leave you with this. The problems we face with China go much deeper than the usual trade frictions. We're talking about a country that already has a demographic and geographic magnitude beyond the comprehension of the average person. A country that is growing in economic power and influence. A country that has an agenda. It's leaders are Communist.
That means that they are to a considerable extent immune to the moderating influence of an informed public opinion. They will be working while we are sleeping. You can bet on that. Working to maximize their power on all fronts. We need this Commission.
In formulating your governing statutory provisions, I and other senators, endeavored to ensure that in opening the door to expanded trade with China we do not close our eyes to serious concerns about our national security. You have a difficult burden to lift. You have a very different assignment. Your findings and your proposals will mean much to the future of the United States, to its security, to its economic welfare, and I want you to know, Mr. Chairman, that as the chief author of the resolution, I stand ready to be helpful on when the Commission calls for help.
We want to hear from you, we want to work with you, and we look forward to your reports, to your proposals, to your guidance, to your leadership, and I wish you success in this all important endeavor. I know, Mr. Chairman, from my previous associations with you and several of the members of this Commission, that you will approach your task with great dedication, with knowledge and with wisdom and with common sense, and always with your guard up. I wish you success.

CHAIRMAN D'AMATO: Thank you very much, Senator Byrd and Mr. Chairman, for your time in coming and for authoring the resolution and your confidence in the Commission. We're going to be working very hard to mach that with a good product and we certainly will come to you if we need help, and we might need help. But it's a great challenge and we thank you for putting it to us.
SENATOR BYRD: Thank you very much.
CHAIRMAN D'AMATO: Thank you very much for coming. We have also with us this morning Senator Thompson, who has been involved in the creation of this Commission as well, and we look forward to hearing from you, Senator Thompson, whose work last year on proliferation matters was instrumental in fashioning some of the provisions of the statute in the area of proliferation, an area that Senator Thompson has taken tremendous effort and time to investigate, and we look forward to your remarks, Senator.

SENATOR THOMPSON: Thank you Mr. Chairman and members of the Commission. I want to first thank Senator Byrd and Senator Warner for being the moving and primary force behind what we're doing here today. I think it is absolutely essential that you do what you're doing.
I come before you today as someone who does not claim to be a China expert, but as a Member of the United States Senate who has been chairman of a committee with some jurisdiction in the proliferation area, also serving on the Intelligence Committee, who has become increasingly concerned about the issues that you're going to be dealing with. I think it is clear that this is probably is the most important bilateral relationships this country has, the one with China. Looking into the future, it is clear that it is in our self interest to have a peaceful and productive relationship with China.
It is clear that diplomacy and engagement must play a large part in this relationship, but it is also clear that it's not totally within our control. We have to ask ourselves about certain things that try as we might, if the relationship doesn’t work out, what are the ramifications. Quite frankly, I have been concerned that it has been very difficult to get an independent assessment of some of the things that the United States is doing. No one is more committed to the notion of free trade than I am. I've supported permanent normal trade relations with China every time, and I’ve supported China's entry into the WTO. But it seems to me that our investments in China -- now we're the second in the world in terms of foreign investment in China and even though we run a substantial deficit with China, that trade is becoming so important to our country that sometimes it's difficult to get an independent assessment of the significance of entire relationship with the PRC.
This is no reflection on anyone in particular. It's just that you can pick a side and have a logical argument for any side, and there have not been very many people coming to Congress and lobbying on behalf of being careful in terms of the national security implications of U.S. engagement with China, quite frankly, and you know what I'm talking about.
So thank you for what you're doing. I think that, as I look at the situation from an overview and the context in which we must put the trade and security issues, I hear a lot of things to be optimistic about from people who go over there all the time. Obviously things are changing in China. Obviously there is freedom in areas where none existed before, as long as it does not threaten the Communist leadership. Obviously they've made tremendous strides economically. China will be, in all likelihood, an economic and military power in the future.
The Chinese have begun to do more and more in terms of a freer markets and are struggling mightily to do the things necessary to allow them to be a full participant in the WTO and to fulfill their obligations there.
On the other hand, we cannot ignore the fact that the PRC is engaging in a significant military build-up. They do not pose a threat to the U.S. now and it's not a question of whether or not we would win an all-out engagement with China. The question is, obviously, what their intentions are in terms of the part of the world that they live in, and it seems to me that they intend to be the predominant power in Asia, and that's probably to be expected.
Beijing has announced a 17 percent miliary build-up; I assume nobody really knows what that is. They have 300 or so missiles along the coast pointed toward Taiwan. We've see that there seems to be growing nationalism among the younger people, whom we would hope that we would have been able to reach a little better. They continue to detain American citizens. They are doing things in the South China Sea that indicate that they want a permanent presence there, and they don't want us to be there. That's an inherent, potential difficulty for a long time to come and it's going to give rise to lots of different kinds of incidents there. Their new relationship with Russia, which seems to be in large part based upon military cooperation and arms sales is of concern to us. Obviously, the Taiwan situation is a continuing issue. So there's reason for optimism and there's reason for concern in our relationship with China. s
It seems to me that in terms of trade, that both the United States and China are engaged in a substantial gamble, as it were. I think that we're gambling on the idea that if we engage, if we do not make an enemy out of this country, if we trade, if we invest, that with the advent of the Internet and the rest of the high tech world we live in, that China will gradually open up further and further and will probably democratize, or at least be more and more interested in a peaceful role than they otherwise would be.
We're gambling because we are in the process of assisting them, directly and indirectly, in terms of their economic and military capabilities. So wherever they go we will have helped them get there. The Chinese, on the other hand I think, are gambling that they can open up and do the things necessary to be a prosperous and growing country, while still keeping the lid on and holding onto power.
My concern is that not that this gamble is not worth the taking, but that we make sure we think through it in terms of what if we're wrong. If we're right, then we're in pretty good shape; but if we're wrong, we need to think about the implications of that. It does seem to me that we need to settle in for the long-term, and hope for the best.
I was talking to a leader of one of the countries in Asia and who is a friend of the United States, he is obviously interested in China being as happy as it can. But he said don't worry about this next group of leaders coming on, worry about the ones after them. This next group is going to be pretty much like the ones you're seeing now, so look down the road a bit. That makes sense to me.
The problem to me in the meantime, the various things that can happen, how do we handle those issues, whether it be with Taiwan or some other matter when they arise. Even though we're willing to take this gamble, is there anything to be said for not enhancing their military, or even perhaps their economic growth in the meantime. I don't pretend to have an answer to the economic part.
But in terms of the military htmect, I would certainly think that it would be in our interest to slowly proceed particularly as China proliferates weapons of mass destruction around the world. They've made it quite clear to this country that they intend on violating international norms. They intend on assisting nations of concern around the world. As long as we insist on things like a missile defense system for defensive purposes, they're going to do these things that would assist these rogue nations with regard to their offensive WMD and ballistic missile ambitions.
We are now in the strange position of trading quite freely with two or three countries - such as China and Russia, sending them dual-use technology that is very highly debated on this side of the Pacific in terms of its military significance and the wisdom of selling it, while China is in turn sending technology (missile technology, nuclear technology, expertise, etc.) to these rogue nations, who we use in return as a reason why we need a national missile defense system.
So you know it doesn't make a whole lot of sense to me, and I can understand why some of our friends are a little skeptical with regard to a national missile defense system, why we are not behaving in a manner that indicates that we really do think that a real, strategic threat is out there and that we ought to be very, very careful not to enhance it.
One of the issues, of course, that's on the table is what our export control policies should be. Again, my primary concern is not that we adopt some kind of detailed approach that I'm advocating. I don't pretend to be able to have all those answers. I do have a deep feeling that no one else does either really, and that we have not had an objective analysis of all the implications of some of the proposed and enacted changes to our export control policies. We've had a lot of people look at this issue, but quite frankly, I think it's too commercially oriented in many cases.
It's easy to make the case that the genie's out of the bottle and we can't stop everything so we shouldn't try to stop anything. There's a certain logic to that until you get beneath the surface of it and realize that, even though we live in a different world technologically, and that we are ahead in many areas, that there is something to not only the transfer of hardware or even the software, but the long term maintenance and support that takes place after the sale. With regard to high performance computers, the king of dual use items, many are now advocating the abolition of any controls on computer hardware. We do know that the GAO has compiled a list of potential things that might be looked at other than, for example, concentrating on the MTOP levels (which measures computer spreads) which is probably outdated and that have not been looked at. So we need to be careful about what technologies we sell to China and others.
And do we want the Department of Commerce making these decisions? We have a system now where that is the case. In the current legislation being proposed to re-authorize the Export Administration Act, the Department of Commerce can make a determination of mass marketing, and other examination foreign availability, things of that nature, and unilaterally control sensitive items. The Department of Commerce must notify the other departments, but essentially they make the determination. Furthermore, as you go along in this process, the President can step in and override a decision, but it's been set up so that he cannot delegate any of it, and that he's got to report to Congress every time he turns around, and then jump through all kinds of hoops in order to override what the Secretary of Commerce does. I think that bears close analysis in terms of whether or not, at a minimum, it's in our interest to be more careful regarding some of these activities, and how do we all -- we all seem to agree that we need to build “higher fences” around fewer things, but I don't know anyone who's really taken an objective look as to what those items are and where those fences are, because I don’t see any higher fences.
There are related issues concerning our capital markets. I think that we should also look at the transparency of our capital markets and see whether or not it makes sense for us to open our stock and bond markets to the raising of billions of dollars when we do not know what the monies are going for.
So I think that as you deal with this important set of issues, it's important that you really look at some of the assumptions that are going around that may or may not be true. It is taken as gospel, for example that unilateral sanctions never work. I don't know whether that’s true or not, but I think you ought to take a look at it.
The Congress is about presumably about to pass the Iran-Libya Sanctions Act again, apparently unanimously, while still saying that sanctions don't work. I don’t understand the logic there.
The other concept that holds weight in Washington is that trade and engagement promote democratization and help avoid conflict. Ironically, that's what we thought right before World War I and World War II. It makes a certain amount of sense at face value, and perhaps we don't have any choice but to try it. But to be unduly optimistic or say that it is a foregone conclusion that this kind of engagement is going to lead to good and peaceful things is irresponsible. I think this is another issue that needs to be looked at. You can call on the historians perhaps to help you out with regard to question and get technical experts to tell you what high-tech, dual-use are uncontrollable, and if they are uncontrollable and to what extent. If they are uncontrollable I see no reason for having the country tier system. And if that’s true, I don't see any reason why we don’t go ahead and sell these items to Iran, Iraq, and Libya, and cut out the middle man, if the technologies are truly “uncontrollable”.
So I think those issues might be subject to inquiry. These are just some rambling thoughts of mine, of someone whose been somewhat involved in the national security area and has major concerns. I know that once you do your work and come to your conclusions and I am going to feel a lot better about these matters, regardless of what your conclusions are, because I know that there will at least have been an objective, thoughtful analysis of the situation.
Thank you very much.

CHAIRMAN D'AMATO: Thank you very much, Senator Thompson. Thank you for your leadership and for that menu of items.
Just two points I might make that you made on the Chinese budget, the 17 percent increase. An increase of 17% of something that's unknown is a 17% larger unknown, so we're going to take on a project to try to get our hands around the Chinese budgeting system which has not yet been really identified in precise detail.
SENATOR THOMPSON: That's a good idea. Lots of luck to you. I hope you're able to do that, but it reminds me of one more thing that I think is important for all of us, and that is to acknowledge what is unknowable. And I think just admitting sometimes that we don't know what's going on here is helpful to us as policy makers.
CHAIRMAN D'AMATO: Yes, sir.
SENATOR THOMPSON: If that is the case.
CHAIRMAN D'AMATO: Yes, sir. One other item that you mentioned was threat reduction measures, and Senator Byrd mentioned that also. We had a closed session with officials that have been attempting to develop threat reduction mechanisms with the Chinese with singular unproductivity over the last few years. We've been very, very unable to engage the Chinese in the threat reduction mechanism that we developed with the Russians over the years, and one of the things we're going to look into is why are we not able to succeed in that area. We have no circuit breakers in the relationship and it seems like the Chinese don't at this point yet want to do that and we don't know why. So there are a lot of unknowns here.
We have Senator Sarbanes with us again this morning. Senator Sarbanes was involved in helping to draft the original legislation and shepherding it through the Senate and is the Chairman of the Senate Banking Committee. A number of issues before the Senate Banking Committee dealing with capital markets that this Commission is going to look into.
We welcome you, Senator Sarbanes.

SENATOR SARBANES: Thank you very much, Mr. Chairman. I am very pleased to join Senator Byrd and Senator Thompson and have this opportunity to participate in the first public hearing of the U.S.-China Security Review Commission.
I joined with Senator Byrd and Senator Dorgan in sponsoring the legislation which established the Trade Deficit Review Commission, which was in a sense a predecessor to this Commission. I think the report produced by that Commission did an excellent job of laying out the challenges posed by the trade deficit. It laid out competing views on how that challenge might be met. While, they did not reach a unanimous conclusion, but on balance I thought that the report performed a very useful public service, and I am hopeful that the work of this Commission will be equally valuable.
According to the legislation establishing this Commission, its purpose is to monitor, investigate and report to Congress on the national security implications of a bilateral trade and economic relationship between the United States and the Peoples Republic of China. We look forward to the annual report that is called for under the statute.
I strongly believe that the U.S.-China trade relationship should be considered in the context of our overall relationship with China, including national security, foreign policy, human rights, labor rights and the environment. I strongly support permanent, normal relations with China which would link all of our diverse interest with China into an integrated policy. I did not support permanent, normal trade relations with China which is, of course, one of the issues under your consideration, because in my view it would have separated trade from our other important concerns with China. I think it should all be dealt with in an overall context and the objective should be to move to permanent, normal relations across the board in all of these areas. I do not support taking trade outside and separating it.
For that reason I believe the Commission has a very important role to play in shining a light on the impact of the U.S.-China trade relationships on our national security relationship with China. I am very supportive of the work that you have to do and I look forward to reviewing your reports.
The subject that you are hearing today is U.S.-China Trade and Investment Policies and their Impact on the U.S. Economy. This is a matter of grave concern to me and I'd like to make a few comments. I'm going to shorten my prepared statement, Mr. Chairman, which I think everyone has before them, and try to move through this very quickly. However, there are several points I really want to highlight.
The U.S. bilateral trade relationship with China is arguably our most one-sided bilateral trade relationship in the world. We've been running a steadily increasing trade deficit with China. Every year we set a new record for our trade deficit with China and in 2000 the Commerce Department reported that the trade deficit had reached 83.8 billion. Last year the U.S. trade deficit with China surpassed the U.S. trade deficit with Japan about which we've heard so much. Of course, I hasten to point out that the trade deficit with Japan at least is within the context of a relationship in these other areas -- security, foreign policy, human rights -- in which we have a very positive and constructive situation.
Although the U.S. trade deficit with China is only slightly larger than our deficit with Japan, it's important to recognize how one-sided the China relationship is relative to the size of our overall volume of trade with China.
The trade deficit with Japan was based on the total trade of about $212 billion. The trade deficit with China, slightly larger than Japan, was based on a total volume of trade of $116 billion. I love to watch these commentators say well we have $116 billion trade situation with China. 16.3 of it are our exports to China and a hundred billion of it are the imports that we take from China.
Now this pattern is, if you look at Canada, the European Union, Mexico, exports make up about 45 percent. We're running deficits with all those trading partners, but our exports are about 45 percent of the trade relationship and it fluctuates. It's not all necessarily on just a straight line progression as the trade relationship with China is. Even with Japan exports make up 30 percent of the total volume of trade. Exports make up 14 percent of our trade with China. Of this total 116 billion 14 percent is export to China. If you compare it with Korea, Taiwan, Singapore, we do much less trade but we have more exports than we send to China in absolute terms.
It could be argued that China runs a larger trade surplus with the U.S. because the U.S. market is more open than the markets of Japan and the EU and thus takes in a larger volume of exports from China. Now, while this may be true it is also true that China purchases a substantial volume of exports from Japan and the EU, even though overall it has a larger volume of trade with the United States.
In 2000, China took 30 billion in exports from Japan, 25 billion from the EU, 16 billion from the United States. It's a very one-sided relationship. It's very much a one-way street.
It's been argued that most exports from China to the United States are not made in the United States, and therefore do not compete with U.S. products. As a result some argue that some of the increase in China exports to the U.S. has come at the expense of exporters in third countries such as Mexico, South Korea, Taiwan, and not at the expense of U.S. manufacturers. It's worth noting that although these other countries also run trade surpluses with the U.S., the U.S. balance of trade with those countries is not nearly as one-sided as it is with China. In fact, if our trade were higher with these other countries -- people say it doesn't matter, China's simply supplanting them -- but it's reasonable to presume if the trade were higher with these other countries our exports to those other countries would be higher. There's much more of a relationship than when it shifts to China where they send the imports in but don't take the exports back.
Furthermore, I think this analysis has limited validity. The Congressional Research Service reports that in 1999 the top six U.S. imports from China by dollar value were miscellaneous manufactured articles, footwear, office machines and automatic data processing machines, telecommunications and sound equipment, apparel and accessories and electrical machinery. Now, according to the CRS, while U.S. imports in all these categories have increased, the most dramatic percentage changes have not been in sectors such as footwear and apparel, traditional labor intensive industries in which China is quite competitive, but in high technology sectors such as office and data processing machines, electrical machinery and appliances and telecommunications and sound equipment. Now, according to the CRS this trend held up in 2000.
In other words, the character of imports from China is shifting to increasingly sophisticated categories of products which actually compete directly with goods made in the United States. So that's an important development that's now taking place and we keep in mind, because there's a tendency to sort of dismiss it and say well, it's in those areas and we wouldn't make it in the United States in any event. Of course, if it was made elsewhere and the country that made them then took our exports that would be one benefit to our trade relationship, but furthermore, the nature of their exports is changing to move into sectors that is directly competitive.
And I want to turn very quickly to the U.S. investment relationship with China and it's impact on trade. Some observers argue that the prospects for opening the Chinese market may actually be better than those of opening the Japanese or Korean markets at a comparable stage of development. These observers point out that China's much more open to foreign investment than Japan or Korea were at those earlier stages. In fact, China has actively sought foreign direct investment as sources of Western capital and technology, and foreign direct investment have been a key element in China's development strategy. But China's receptiveness to foreign investment does not necessarily mean openness to imports.
In fact, trade barriers in sectors such as automobiles have been part of China's strategy to encourage foreign investment. Since the Chinese market could not be accessed easily through exports Western automakers that want a portion of the Chinese market were effectively forced to invest in China. Once inside the market many Western companies took a different view of Chinese trade barriers because they were then also protected from competition from outside China. The unstated assumption that openness to foreign investment will eventually lead to openness in foreign trade I think needs to be carefully examined.
It is not clear that reforms undertaken to encourage foreign investment will inevitably lead to lower trade barriers and more imports. In fact, China's increasing demands for domestic production and for transfer of technology suggests that the opposite well may be true.
An article in the Wall Street Journal about a year ago, just after the House voted on PNTR, a focus on the investment htmect of the Chinese WTO agreement. The article stated, and I quote: "Even before the first vote was cast yesterday in Congress' decision to permanently normalize U.S. trade with China, corporate America was making plans to revolutionize the way it does business on the mainland. And while the debate in Washington focused mainly on the probable lift for U.S. exports to China, many U.S. multi-nationals have something different in mind."
"This deal is about investment, not exports," says Joseph Quinlan, an economist from Morgan Stanley Dean Witter. U.S. foreign investment is about to overtake U.S. exports as a primary means by which U.S. companies deliver goods to China." A comparison of U.S. trade with China and U.S. investment in China over the past decade is instructive. U.S. exports from '91 to 1999 increased on an annual basis from 6.2 billion to 13.1 billion, slightly doubling, and imports from China, as I indicated earlier, rose from 20 billion to 81 billion over that same period of time, a fourfold increase.
During that same period U.S. foreign direct investment in China rose from 323 million in 1991 to 4.3 billion in 1999, a 13-fold increase. Whereas the U.S. ranked behind Japan, behind the European Union and behind Taiwan as a source of exports to China, it ranked ahead of all of them as a source of foreign direct investment in China. Rather than expanding exports and reducing the U.S. trade deficit with China, China's purpose in encouraging U.S. investment in China may be directly the opposite, and I think that assertion is consistently made and needs to be very carefully examined. My perception is they're following quite a different strategy which in a very tough calculation of their self interest sort of makes sense, but we ought to be comparable of calculations of self interest.
Let me conclude by reiterating my strong support for the work of the Commission. It is difficult to escape the conclusion that the large bilateral trade surpluses that China runs with the United States are used, at least in part, to bolster and support China's military establishment. China's policies for attracting foreign investment and technology also have significant national security implications, including of course their constant pressing for the transfer of technology. This Commission has an opportunity to make a major contribution and – to increasing understanding of this very important htmect of the U.S.-China relationship. I wish you the very best in your endeavors.
Thank you very much.

CHAIRMAN D'AMATO: Thank you very much, Chairman Sarbanes, for your leadership on this. The whole question of exporting productive facilities from the United States as opposed to exporting goods in the Chinese consumer market, as you've mentioned, that seems to --
SENATOR SARBANES: The jobs are then in China, not in the U.S.
CHAIRMAN D'AMATO: We're exporting the facilities but not the goods.
SENATOR SARBANES: Right.
CHAIRMAN D'AMATO: Getting the goods back here from those facilities.
SENATOR SARBANES: That's right; exactly.
CHAIRMAN D'AMATO: So that whole dynamic is something that really isn't quite in focus yet, so thank you for your thoughts on that one.
We also have with us today the distinguished senator from Nebraska, Senator Hagel, who's been a leader in this area and a leader in the global warming area and in trade. We look forward to your testimony.

SENATOR HAGEL: Mr. Chairman, thank you, and I too add my thanks and good wishes to each of you for your important tasks ahead in this very relevant assignment that has been given you. I don't know if there is an issue that wraps around as many dynamics of our future, and future of the world than our relationship with China.
Mr. Chairman, as you all recognize, your Commission is charged with the task of assessing the impact of the U.S.-China economic relationship upon our national security. This is critical work because national security is the most fundamental consideration of any foreign policy. It is also difficult work because the many factors that influence national security are interconnected, uncontrollable and difficult to assess on an individual basis. That is especially true for economic factors in this interconnected global economy.
Compounding the problem is the fact that our relationship with China is the most complicated bilateral relationship we have today, and that is likely to remain true for many years. China is a rising power increasingly capable of challenging U.S. interests in Asia. Domestically Chinese society has been undergoing significant and fundamental change. It is impossible to predict what China will look like in 10 years, much less 20 years. Only one thing is certain. Our national security interests and those of our friends and allies in Asia will be best served, in my opinion, if we find ways to establish a working relationship with China that allows us to peacefully work through our differences, of which there are many and of which there will be many.
The United States has and will continue to have serious differences with China, including human rights, religious freedoms, threatening military posturing toward Taiwan, proliferation of missile technology, and the most recent example, how the Chinese handled the P-3 incident.
The P-3 incident is a good reality test, however. It demonstrates the hard work that lies ahead for all of us if we are to forge a relationship between our two countries that allows us to manage our differences peacefully. The challenge of injecting some stability and predictability into U.S. China relations is considerable. However, the opportunities are also considerable, and the alternative is unacceptable and dangerous.
A working relationship must be founded on common interests. One such shared over arching interest with the people of China is trade. Trade is the biggest common denominator between our two countries. It is not a panacea or an excuse to defer the tough decisions, but rather it offers the mutual benefits necessary to constructing a stable relationship for the future. For that reason I believe the economic engagement with China strongly serves our national security interests.
It is clearly in America's economic interest to open up China's markets and increase trade opportunities. Trade is increasingly important to our own economic growth. You all know the numbers. Senator Sarbanes recited some. I suspect other witnesses this morning have recited numbers.
Last year's Congressional vote on permanent normal trade relations was a good start. If Congress had not voted to grant PNTR to China we would have put our American businesses and farmers at a disadvantage compared to their competitors from Europe and Asia. In this increasingly competitive global economy it would not have made sense to penalize our own national interest.
When China accedes to the World Trade Organization American businesses and farmers will begin to have a fair shot at China's market. It will take years to realize that potential. For example, the USDA estimates that China's WTO accession could triple U.S. agriculture exports by 2005, and there are other projections for all industries, all services.
It is also clearly in the interest of the Chinese people for China to open up its markets. The beneficiaries of increased trade are the Chinese people. Trade and foreign investment have been the engines of economic growth in China and have helped pull millions in China out of poverty. Chinese citizens benefit from the jobs created by American investors who seek to establish a domestic presence in China. America's markets and capital are vital, of course, to China's continued economic growth and increased prosperity for its people. Senator Sarbanes touched on that rather clearly.
This in turn is very important for American's long-term economic and geo-political interests not only in China but in all of Asia. Trade, investment and economic growth can help improve personal liberty and quality of life for millions of Chinese. History records that economic growth helps promote freedom. The alternative is also clear. During the decades that China shut itself off from the rest of the world, the Chinese people suffered terribly from campaigns that ruined the economy, starved the people, and suppressed all forms of personal freedom, including religious freedom. Tens of millions of people lost their lives during those decades. It is no coincidence that the strongest advocates for political change in Beijing are also the strongest proponents of continued U.S.-China trade and China's accession to the WTO.
Leaders in Taiwan, Hong Kong's democratic activist and Legislative Council Member, Martin Lee; the Dalai Llama and many prominent Chinese dissidents like Dai Ching, are pushing for China's accession to the WTO. They understand the link between an open economy and an open political system. They understand that shutting down the millions of exchanges that trade entails plays into the hands of the Chinese hardliners.
China has a long way to go, but trade with other nations will move it in the right direction and help sustain the momentum for change.
In summary, Mr. Chairman, for all these reasons and more the current U.S. policy of economic engagement with China serves American national security interests. However, we must also address the need to get our own house in order in terms of the export of dual-use technologies and goods to China. The Export Administration Act Reauthorization Bill, yet to be considered in the Senate, will help achieve more practical controls on potentially dangerous goods going to China by focusing our resources on the truly critical technologies key to weapons proliferation, and not on goods easily available now in the global marketplace.
A transparent, efficient and realistic system of export controls will encourage the full participation and attention of the business community and enhance its ability to comply with all export requirements. We must also work with our allies and our friends in this effort. The effectiveness of unilateral controls is limited and will only go so far. Unilateral sanctions in today's world do not serve the economic, geo-political or security interests of this country. They are the lazy, unimaginative and self defeating approaches to difficult and complicated problems. It is the easy, simple way to defer the tough decisions. We are better than that.
We must also recognize the limits of our ability to influence Beijing's behavior. We cannot control the decisions of Chinese leaders. We do not know if they will be wise enough to meet us and the world halfway and search for opportunities for cooperation rather than focusing on our differences.
The mutual benefits of trade and investment may not be enough to outweigh those differences and prevent our countries from engaging in serious clashes. We can however control our own approach. As the Congress once again approaches the yearly debate on granting normal trade relations to China we should remember that withholding NTR would represent a deliberate move to destroy the trade relationship. Would this make Asia more stable? Would our national security interests be better served? Would it advance all of our interests? Would it further human rights in China? The answer to all of these questions, Mr. Chairman, is a very clear resounding no. It would deal a blow to one of the single most important common interests of our two countries. That would be short sighted and unwise.
Mr. Chairman, I believe the most important dynamic in our relationship in China is to always frame up the issues, our policies and our actions from the perspective of the big picture focusing on long-term consequences as well as short-term consequences. The long-term view must always be our paramount view in dealing with China.
Mr. Chairman, I appreciate an opportunity to appear before your Commission and I wish you all much success with this important assignment. Thank you.

CHAIRMAN D'AMATO: Thank you very much, Senator Hagel, for coming down and sharing your views with us. You remind us that the challenge is a big one for the United States. It's probably our most important challenge as a world leader in this new century and for this Commission and for the Senate to handle it appropriately to engage this country in a way that's going to maximize all the facets of the relationship and our own leadership and our own economy and national security.
SENATOR HAGEL: Thank you.
CHAIRMAN D'AMATO: I look forward to seeing you again. Thank you very much for coming.
We're going to be moving into our first panel, and as Chairman I have -- I'm engaging in a practice of asking various Commissioners to organize and chair our various hearings. The Commissioners Mulloy and Lilley have taken the responsibility of organizing this upcoming hearing, and I'm going to turn the gavel over to Commissioner Mulloy to chair the rest of today's events.
Thank you.
CO-CHAIRMAN MULLOY: I am very pleased to have been asked by Chairman D'Amato and my fellow Commissioners on the United States-China Security Review Commission to co-chair, along with Ambassador Jim Lilley, the Commission's first public hearing.
Congress created this Commission last October for the purpose of monitoring, investigating and reporting to it on, among other things, the national security implications and impact of the bilateral trade and economic relationship between the United States and the People's Republic of China. It is charged to provide its first report to Congress by March 2002 on its findings, along with recommendations, if any, for legislative or executive action.
This bi-partisan Commission is composed of 12 Commissioners, three of whom were appointed by each of the Congressional leaders in both the House and the Senate. I feel fortunate to have been appointed by Majority Leader Daschle to take part in the work of the Commission.
Now, to assist it in carrying out its duties the Commission has planned out a series of hearings over the next several months to hear testimony from a variety of witnesses on various htmects of the U.S.-China relationship that we are tasked to examine by our Congressional charter. We decided that we should begin our work by first taking a broad look at the rationale for our current trade and investment policies toward China. We are very fortunate to have assembled a group of quite distinguished witnesses today who have very different views as to whether the economic policies we now pursue toward China serve the long-run interests of our nation.
Hearing these contrasting views on the issues we are charged to examine will help this Commission sharpen its own inquiry and internal discussions.
Our first panel today is comprised of Mr. Richard Trumka, the Secretary-Treasurer of the AFL-CIO; Mr. Gary Benanav, the President and CEO of the New York Life International Company; and Mr. Robert Kapp, the President of the U.S.-China Business Council.
Now, on our second panel we have The Honorable Charlene Barshefskey, the former United States Trade Representative who negotiated the November 1999 Bilateral Market Access Agreement with China that prepared the way for China's entry into the WTO which could happen later this year. In addition to Ambassador Barshefsky we feel very fortunate to have with us Admiral Joseph W. Prueher who was our Ambassador to China from December 1999 through May of this year. Previously the Admiral served as our Commander in Chief of the U.S. Pacific Command, so he brings an expertise on China and national security matters that we very much welcome.
This afternoon the Commission will hear from Mr. William Wolman, the Chief Economist of Business Week Magazine, who is accompanied by his wife and New York financial journalist Anne Colamosca.
In addition other testimony will be presented by Professor Jerome Cohen, a Professsor of Chinese Law at New York University Law School; Mr. Kevin Kearns, President of the U.S. Business and Industry Council; and Rupert Hammond Chambers, President of the U.S. Taiwan Business Council.
We appreciate very much the excellent prepared testimony that witnesses have already submitted to the Commission, and we thank all of our witnesses for taking time to come in and express their views on the important matters that this Commission has been charged by Congress to study.
Before I go through the procedures we're going to follow, let me turn to my co-chair, Ambassador Lilley and see if there's anything he wishes to say at this point.
CO-CHAIRMAN LILLEY: Oh, just a few comments. It's very odd for me to be on this side being queried. It's a new experience so bear with me.
I think the one thing that becomes apparent is the contradictions in China in the testimony that we've been getting and that we've just gotten. I think one of the difficulties we have is to stay away from anecdotal analysis, which tends to affect our objectivity on China. This challenging testimony from a lot of very smart and experienced people is a revelation and is illuminating, and reflects our problems in analyzing China. Some witnesses do a selling job, some offer loaded reading, others reflect certain biases, some give us objective facts.
These are very complex issues, as is spelled out in some of the testimony and I think Senator Thompson said it very well when he said this is not a game we're playing, we've got to get it right. It's a life and death business and it's the balance of trade and commerce with security, and the judgments we have to make on this are key.
I'll just raise one question, which will probably come up, as a result of our testimony today. Is the dynamic of the Taiwan-China commercial relationship strong enough to offset the security problems that everybody loves to talk about in mentioning flash points? Is the economic dynamism more important than our security framework, are we living in the new era or do we need to put both in balance?
So I just end on that note. Let's proceed.
CO-CHAIRMAN MULLOY: Okay. Now, the procedures we're going to follow is each witness will have 10 minutes to make a prepared statement. At that point the red light will go on and you should cease your statements. Each Commissioner will then have seven minutes to ask his questions and then the red light will go on and we’ll move on to the next Commissioner and we'll alternate between Republican and Democratic appointees.
So if I could first call on Mr. Richard Trumka, Secretary-Treasurer of the AFL-CIO.

MR. TRUMKA: Thank you, Mr. Chairman, members of the Commission. I want to thank you for the opportunity to speak to you today on behalf of 13 million working men and women of the AFL-CIO about U.S. trade investment policies toward China. This Commission is charged with a very important task; to study, evaluate and report to Congress on the economic and security implications of a bilateral economic relationship between the United States and the People's Republic of China.
Our economic relationship with China is one of the most controversial and complicated relationships that we have with any country, and for good reason. The AFL-CIO recognizes that refusing to engage with China is not an option in today's interconnected global economy. The question is thus not whether to engage with China but how to engage with China. How do we trade with China without sacrificing our own manufacturing sector and forcing workers worldwide into a downward spiral for ever lower wages and ever more aggressive assaults on worker rights? How do we invest in China without providing unconditional support to a government that routinely violates the human rights of its citizens? How do we help reform its economy in a way that promotes freedom, not just for the multinational companies that do business with China, but for the ordinary Chinese men and women? Unfortunately the policy options Congress and the Administration may employ to address these difficult questions will be severely limited once China becomes a member of the World Trade Organization and enjoys permanent normal trade relations with the United States.
The AFL-CIO has supported a policy that maximizes the benefits of trade and investment with China, but also recognizes the risks of allowing rampant violations of human and worker rights to go unchecked. WTO rules do not allow such a policy of responsible engagement because they prohibit any linkage between trade and human rights. Thus the already limited tools to which we have access in the past to address violations of human rights and unfair trade practices, tools such as our unilateral trade laws and annual reviews, will no longer be available to use once China's accession to the WTO is complete.
Last year, Mr. Chairman, we urged Congress not to grant permanent normal trade relations precisely because we did not want to give up the leverage while so many of our differences with China remain unresolved, but we gave up this leverage even before the commercial terms of China's accession to the WTO were complete, which is one of the main reasons we've had to endure nearly a year of deadlock to hammer out an acceptable accession agreement with the Chinese Government.
Now, many argue that these tools are unnecessary, that as U.S. companies invest and produce more in China and as U.S. consumers buy more goods made in China we will automatically be contributing to the country's economic development and political opening by exporting American values. But these promised benefits are far from guaranteed.
In fact, our own State Department reports that the human rights situation in China deteriorated markedly in '98, in '99 and again n 2000, despite record growth in our trade and investment with China over the same period. This environment of repression envelops workers as well. The Chinese government continues to systematically deny workers their fundamental rights -- universal human rights defined in the ILO Declaration of Fundamental Principles and Rights at Work as freedom of association, the right to organize and bargain collectively, the right to reject child labor, refuse forced labor, and to be free from discrimination in the work place.
Independent trade unions are illegal in China. Chinese workers who try to form independent unions risk their jobs, their freedom and sometimes their lives. U.S. multinationals directly profit form this abuse.
Over the past year reports of labor protests, arrests and violence have become more frequent as economic transformation and dislocation have left many Chinese workers without jobs and without any legal recourse to press their claims for compensation. As China struggles to live up to its WTO obligations these pressures will intensify.
Meanwhile, child labor and forced labor continue. Just this May 39 Chinese men died while performing forced labor at a prison run mine when the coal shaft they were working in flooded. In March of this year 42 people, including 38 children, were killed in an explosion at a school where children between the ages of 9 and 11 were forced to manufacture fireworks. Finally, China still refuses to allow inspection by U.S. Customs officials of facilities suspected of exporting prison labor products to the U.S. in direct violation of numerous agreements already signed between the Chinese and U.S. governments.
Our current trade and investment relationship with China, marked by exploding flows of money and goods and increasing corporate freedom on the one hand and the drastically unequal distribution of wealth and severe constraints on human freedom on the other, has profound implications for our own economy and for our national security. This Commission is uniquely positioned to spell out these implications and to suggest policies to address them.
There are many htmects of our relationship with China that merit your attention, but I want to focus my remarks on two: The unique nature of our trade deficit with China and the impact of U.S. investment in Chinese export production on workers in the U.S. and other countries. If we value human rights, and hope for democracy and stability in China and the Asian region, the U.S. must use our bilateral economic relationship to press the Chinese government to pursue an economic development model that is based on respect for workers' rights and human dignity, not just compliance with investor rights and WTO rules.
Our trade relationship with China is severely unbalanced and still deteriorating. In 2000 our trade deficit with China continued to break records, jumping more than 20 percent above the level in 1999 and zooming past the $80 billion mark. China replaced Japan as the country with which we hold the largest single bilateral trade deficit. Not only is our trade deficit huge and growing, but the ratio of exports to imports is grossly lopsided. For every dollar of goods we send to China, China sends more than six dollars worth of goods to us. Figures this year show that despite the slowdown in our economy our trade deficit with China is set to rise again and may top $90 billion.
Just as exports can generate new jobs for American workers, import competition often displaces American jobs. When consumer demand is met with imports instead of domestic production, existing jobs can be lost, and new manufacturing jobs are not created in the U.S.
Since July of 2000 we've lost 675,000 manufacturing jobs in this country. In fact, the '90s boom is the only recovery in modern history during which we actually lost manufacturing jobs. This loss means that we now have fewer manufacturing workers in the United States than we did in 1965. These are good jobs, Mr. Chairman, family supporting jobs, and as U.S. workers lose manufacturing jobs due to imports they normally take a large cut in pay, 9 percent on average, when they're lucky enough to find a new job.
Many people know that China enjoys a huge trade surplus with the United States but they don't know the goods that we buy from China are not just inexpensive toys and clothes we see on the shelves. In fact, in 2000 the two largest single categories of products we imported from China were electronics and machinery.
I assume, Mr. Chairman, that the red lights tells me that --
CO-CHAIRMAN MULLOY: Yes. If you would want to finish up shortly and then we'll move on to the next witness. Thank you, Mr. Trumka.
MR. TRUMKA: Other developed nations do not have the same kind of lopsided trade that we do with China. While reliable figures on international trade with China are hard to come by, statistics from the International Monetary Fund show that the United States is the single biggest market for China goods, buying anywhere from 25 to 50 percent of China's exports to the world.
We import two to three times more from China than either Europe or Japan does, while Europe and Japan each export more than we do to China. As a result, the European Union enjoyed a trade surplus with China of almost $5 billion in 1999, and Japan had a trade deficit with China of less than $20 billion, about a quarter of our deficit.
These figures show that U.S. consumers are a huge source of growth for the Chinese economy and a significant source of hard currency for the Chinese government.
The Commission must decide if the U.S. government should use the leverage of our massively imbalanced trade relationship to support the Chinese people and press the Chinese government to respect basic rights like freedom of speech and freedom of association, or if this leverage should only be used to enforce WTO rules and extract further concessions from our investors.

CO-CHAIRMAN MULLOY: Mr. Trumka, thank you very much. Now, I want you to know that your whole statement will be in the record of the Commission, and most Commissioners, I think, took time to read all of these statements, so you can be assured that we're familiar with everything you had to say.
MR. TRUMKA: Thank you, Mr. Chairman, I appreciate that.
CO-CHAIRMAN MULLOY: Mr. Benanav?

MR. BENANAV: Thank you, Mr. Chairman and members of the Commission. I'm the Chairman and CEO of New York Life International and Vice-Chairman of New York Life Insurance Company. In addition to my corporate responsibilities I serve as the Chairman of the U.S. Committees of the Pacific Basic Economic Council, known as PBEC-US, and the Pacific Economic Cooperation Council, known as US-PECC. I appreciate this opportunity to appear before you during the first open hearing of the U.S.-China Security Review Commission.
I'll summarize my remarks and ask that my formal statement be made part of the record.
CO-CHAIRMAN MULLOY: It will be.
MR. BENANAV: As our nation embarks on the new millennium the rapid economic and political evolution of the People's Republic of China will remain among the most critical international variables for us to consider.
It's my strong belief that we must find a way to deal with China, which advances American national interests while recognizing that both countries' political and economic security are inexplicably linked. Over 30 years ago President Nixon and Henry Kissinger were at crossroads; isolate or integrate with China. I think we all know that they chose the integration path and since that time Presidents and Congresses have had the challenge of how to integrate, not whether to integrate.
My company and its policyholders and employees, like workers and farmers and businesses throughout the country, have a great deal at stake in the way that we as a nation deal with China and the Chinese people.
I'd like to cover three areas in my testimony: The challenge of compliance which China's WTO accession will present, the effects of economic engagement with China, and an assessment of China's domestic political evolution.
Mr. Chairman, as Representative Levin, noted in his March 6th speech at the Center for Strategic and International Studies, "When China ultimately does accede to the WTO, our work will not have ended, it will have just begun." The business community is under no illusion about China's WTO accession.
WTO implementation will not be easy or automatic, just as negotiations between the United States and China were neither easy nor automatic, and the battles for WTO compliance will recur.
It will not be easy because Chinese institutions in many manufacturing and service sectors are still in their formative stages and have not been exposed to competitive market forces. This is certainly true of the insurance industry where the legal structures for regulation are less than a decade old and the China Insurance Regulatory Commission is only three years old.
It will not be automatic because China has not yet developed the full range of institutions needed to underpin the efficient operations of a competitive marketplace. In many cases China's implementation of its market opening commitments will trigger social and economic dislocations and associated adjustment costs. The Chinese recognize this and are prepared to take those pains for the benefit that WTO will bring to them. Government, business and NGOs must be prepared to monitor China's implementation of its WTO commitments and must be willing to work with determination with our counterparts in China to help increase the institutional capacity of China to meet its WTO obligations.
The issue of institution building is critical to China's ability to live up to its market opening commitments. In his recent book "The World Economy: A Millennial Perspective", Angus Maddison has identified one of the central factors for successful economic growth, namely the development of strong legal protections for property rights and the establishment of institutions that foster entrepreneurial activity.
China certainly doesn't lack entrepreneurial spirit. If you've ever walked the Bund in Shanghai or visited a factory in Guangzhou or talked to students at Beijing University, you know the natural entrepreneurial spirit of the Chinese people. But China does lack the institutional foundations on which that entrepreneurial spirit can flourish.
Professor Waldron at the American Enterprise Institute has written eloquently on this point describing his concern, that China's economic growth "rests on shaky foundations -- and these grow more shaky, not less, as the growth continues in a political and institutional vacuum." And I share Professor Waldron's concern.
Building institutional capacity is essential if China is to meet successfully the challenge of implementing its WTO commitments. If we can assist the development of durable rules of law in China one can only imagine how much more entrepreneurial the Chinese people could be. That's why New York Life, like many other companies in trade industry associations, has been actively helping to train Chinese officials about international standards and providing information about the changes needed in Chinese law to meet WTO obligations.
Mr. Chairman, it's in everyone's interest that China grow in a balanced manner, in a manner that promotes its own internal stability and furnishes a market for other countries. Experience points to the key requirements for balanced growth. First and foremost is a system of contractual and intellectual property that allows people to accumulate capital. Developed countries that have advanced economically while maintaining social stability have this in common. China's high domestic savings rate, nearly 40 percent of GDP, allows for significant accumulation of capital.
The second requirement is an efficient and multifaceted financial system, which mobilizes savings and channels them efficiently by offering a range of investment products. In addition, the middle class requires financial instruments that permit individuals to manage risks by pooling their resources.
Foreign insurance and other financial service firms provide a source of expertise, backed by capital resources, needed to meet these two requirements. By participating in the Chinese market, U.S. firms furnish the institutional prerequisites for balanced growth in China, while increasing value for their U.s. shareholders.
The world community has devised institutions to form a system of multilateral rules based on cooperation. The result is a set of building blocks for a global system that can secure and sustain political and economic stability. China needs to have a stake in this global system if it's to realize its growth potential and expand its middle class.
Moreover, the more China is rooted in the international rules-based trading system the greater the cost to China's own economy of taking political or military steps that undermine this system. In short, China's stake in the smooth operation of a global economic system and the interdependence of the global system act as constraints on China's ability to adopt political or military postures that will have the consequence of slowing down or damaging its domestic economic growth opportunities, or at the extremes even impoverishing its own people.
During last year's debate on PNTR, several commentators predicted that opening China's domestic market would inevitably lead to the opening of China's domestic political systems.
I don't believe that this is an issue of simple cause and effect. Open economic systems do not, in and of themselves, inevitably lead to open political systems. But I do believe that without an open economic system there can be no hope of developing an open political system. As China moves towards a more open, less centrally controlled economy, the government will play a diminished role in the operation of the market. A more open economy will stimulate the growth of the private sector. Trade liberalization will allow foreign competition and challenge the efficiency of state owned enterprises. This is exactly what is happening in the insurance sector in China today.
But the effect goes beyond the economic arena. The energized private sector and expanded middle class in China is already demonstrating increased interest in democratic structures and understanding of international norms and values.
I also believe that increased private sector activity will put additional pressure on the People's Liberation Army to follow through on President Jiang's mandated reforms. For this reason we need to support wider interaction between civil society groups in both countries.
U.S. businesses can also help shape a stable and prosperous China by bringing to the Chinese economy their corporate values, world class standards for treatment of workers, commitment to safety in the work place, codes of conduct for business operations, and support for the rule of law and campaigns against fraud and corruption. I believe that the infusion of international standards and values into the Chinese economy will influence the opening of China's political process in a positive manner.
I want to emphasize three points in closing:
First, we must devise a long-term framework for U.S.-China relations which advances our national interest while recognizing that both countries' political and economic security are inextricably linked.
Second, we must in the near term complete China's WTO accession, monitor China's implementation of its WTO commitments, and work with China to build its capacity to comply with WTO obligations.
Finally, to be successful in both the near and long-term we must establish a political consensus domestically that trade with China is a win-win proposition economically and politically for the United States, China and the entire Asia Pacific region.
Thank you, Mr. Chairman.
CO-CHAIRMAN MULLOY: Thank you, Mr. Benanav.
Mr. Robert Kapp, please.

MR. KAPP: Thank you, Chairman Mulloy. Friends, I've asked you to wade through a long piece of testimony, and I even attached some reading, so I won't perhaps take all of my time in this oral section of the meeting.
Let me just say a few things without reading from the text and then we can move to a discussion.
We've all noted that in the last few days the United States and China appear to have reached agreement in Shanghai on the five principal remaining issues that stood in the way of American support for China's accession to the WTO. We don't have all the details on exactly what was agreed to yet. The briefings are now going on on the Hill and elsewhere.
I do think that this last round of discussion between Ambassador Zoellick and his Chinese counterpart is a reminder of the fact that with intense effort, concentrated attention, mastery of the facts, and a real commitment to engage, it is possible for the United States and China to find common ground even in areas of significant dispute. I think we should all take heart from the fact that in spite of the problems that have beset this relationship for so long, and again in recent months, the two sides were able to turn their attention in a very business like way to resolving these difficult issues and were successful in doing so.
The purpose of my testimony today was to attempt, at the beginning of your work, to raise broader issues of context. This hearing has occasioned for me a fair amount of thinking and reading, and I have been struck by the rigidity of so many of the positions that have been taken on the issues that you will be taking up. My hope in raising these contextual issues before turning to the questions that Commissioner Mulloy asked me to address was that I could at least introduce into your dialogue some sense of the richness of the debates and the discussions that are already out there.
The readings that I have appended are items that I felt perhaps were most important to bring into the arena at this time, as were the readings that I put into a list of suggested offerings that I hope the Commission might want to find time to acquire and members might have a chance to look at.
I do feel that to answer the question, “Is it good for the national security or not?” without first addressing key questions of definition at the beginning of the Commission’s work was to put the cart a little bit before the horse; I tried to speak to that in my first remarks.
I might also say that the U.S.-China Business Council is a private, non-profit, 501(c)(6) organization. All Council money comes from annual corporate memberships, except for a little bit of money earned from Council events or from interest accrues in the bank. I hope that all witnesses before the Commission will be equally forthcoming as to their funding sources. I speak as the representative of the Council and not of any one company. It is in the nature of our organization that we are not party to individual corporations’ decision making and deal making with regard to the way they proceed with China. So, even if I wanted to, I am not able to discuss the nuisances or the subtleties or the details of individual corporate engagements that have been made with China on particular products or anything of that sort.
Some of you, of course, have followed the case of Taiwan for many years, and as I thought about Taiwan's trade with the world and China's trade with Taiwan, it did occur to me that we should at least ask ourselves whether on this, as on so many other things, Taiwan offers a sort of glimpse of what could be in China. I think the business community's tendency, as you've seen in my testimony is to take the glass as more than half full as the observation of reality. Business people are on the ground in China. They look around at what it was like doing business there 20 years ago and they see a China that is unthinkably different, and mostly in positive ways. They perceive that the Chinese situation will get even more positive with WTO, though it will take time for all of the things that China has agreed to to be fully implemented.
Mr. Benanav has said, and I would agree, that we need to be a part of that effort, as the Europeans and others are, to help the Chinese to become fully compliant in their WTO commitments as rapidly possible. But our broad sense is that indeed this place is changing in many, many ways for the better, and would have changed far less for the better had it not been for the basic decision to become a part of the world economy, as well as the decision by American and other private sector enterprises around the world to engage with China in those terms.
So we see in many ways harmonization and convergence. An example would be the labor market. I don't mean to offend Richard Trumka here when I speak of the labor market. By contrast to the earlier Chinese situation in which American companies used to find themselves completely unable to engage in at all because all hiring and firing and labor allocation was handled by the government, there is now in fact a much more functioning labor market in which Chinese people can look for jobs, choose their jobs, and relocate for jobs, while employers in some cases they can hire and can also dismiss in ways formerly beyond their prerogatives.
My point is that with China's growing economy, rising living standards, and growing markets, and with China’s growing acclimatization to the standards and habits that tend to govern economic behavior in the developed nations and in market countries around the work, I think American business generally feel, that while there are many difficulties out there and plenty of people you don't like very much, China has come a long way already and will move even more rapidly now in the direction of commonly accepted standards that we find compatible and congenial, not just commercially but also ethically and we hope over the long haul legally. So in that sense I find Taiwan to be an example that is worthy of attention.
Taiwan has made an impressive transition from a one-party Leninist state borne out of the same revolutionary impulse as the Chinese Communist Party, and has moved over 50 years from tragedy and excess to something that every American celebrates, and we should ask ourselves as we go on whether there are lessons to be learned about China's future from this as well.
CO-CHAIRMAN MULLOY: I will have someone check.
MR. KAPP: I will say one more thing before we finish.
Our Council is primarily in the business of helping companies figure out the answers to their questions in China and navigate the difficult and sometimes opaque Chinese landscape.
But I did intentionally mention our U.S.-China Legal Cooperation Fund at the beginning of my testimony. I mentioned that corporate members of the Council have contributed to a small, but we think constructive, effort to support bilateral U.S.-China programs in the broad area of the rule of law. Our programs are covering, as I mentioned, legal concerns ranging from translation of legal dictionaries, to WTO preparation, to legal services for the poor, even importantly two grants in the area of in the compatibility of Chinese labor laws and regulations with international standards.
My point is that in the work of the Legal Cooperation Fund, and in the digital video conference series that I've enjoyed conducting this spring with our friends in Shanghai to help bring American expertise to an important audience in China on WTO issues and WTO compliance, we see examples of what all Americans, in the Congress, in the private sector, and in every part of civil society could and should become involved in.
We have a lot of work we can do with China. The Chinese welcome it. It is in our interest as a nation and it is in our interest as Americans, I think, to engage as heavily as possible. And if anyone wants to discuss these experiences that we've had, with a view towards perhaps starting programs of your own, we would be happy to share what we've learned with you.
Thank you.

CO-CHAIRMAN MULLOY: Thank you, Mr. Kapp.
Commissioner Wessel has indicated that he has some questions for the witness, so let me turn to him.
COMMISSIONER WESSEL: Thank you, Mr. Chairman, and thank you for all the witnesses coming today, spending your time. I know how busy you all are and we appreciate your appearance here.
First, I appreciate, Mr. Kapp, your testimony and also the suggested reading list, and would like to ask that the Commission make available to whichever Commissioners so desire copies of the readings that you've offered to us so that we can ensure that we get a full array of information as we move forward on our charge that Congress has put before us.
Your testimony also, Mr. Kapp, addresses as you call it, I think, the givens and you mentioned that at the beginning of your oral presentation today, that Congress has given us a fairly broad charge, and the title of the Commission, which includes the term security, is a somewhat undefined term because of the breadth of the charge and how we move forward in the putting together our first report, the context through which we view all these issues is very important.
Mr. Benanav, you talked about the question of how this is a win-win situation and our job should be to convince the American public of that. I don't know that Congress' job is to convince the American public, but rather it is to listen to them and to listen to their concerns. When a number of members opposed PNTR last year they did so because their definition of national security is viewed through the prism of their public meetings, town hall discussions, et cetera, where the public views national security at their kitchen table. What's happening to their economic security, is their retirement security enhanced? If they're in the manufacturing field is their job security enhanced or undermined?
And as we address the givens, if you will, the questions that Mr. Kapp posed to us, I'd like the other witnesses or all three witnesses to talk about how we should integrate the way that the public views security, again often through the economic frame, with the traditional security issue which is national security in the military sense.
MR. BENANAV: If I could answer that, it's clear that in my view the national security starts with physical security. The first duty of government is to protect its citizens from physical harm, but I think in a complex world like today it goes well beyond that. We're no longer 3 million farmers and as long as land is left alone we're okay.
We're the world's major economic power, and in addition to the physical security htmect, our ability to remain a strong, growing, solid economic power with a rising standard of living, I believe, is part of the national security interest. To be physically safe and impoverished is not what I would consider a successful national security policy. To be both safe and economically well off, with a rising standard of living, is a goal that Congress, the Administration and all of us have in common.
So I think you have to integrate economics and physical security in reaching a conclusion of how to deal with China. It would be much simpler if we cared only about physical security.
COMMISSIONER WESSEL: Mr. Kapp?
MR. KAPP: Well, Commissioner Wessel, I think that the national security of our country, which I appreciate your even asking us about -- sometimes it is not appropriate to ask people associated with it as a community about what the definition of national security is, and I understand the impulse, but I thank you for at least inquiring.
I think it is a complex amalgam. The rising of the oceans is bad for national security too, you know. I mean, a lot of things environmentally, to take another example, affect our national security.
I wouldn't disagree for a minute with Gary Benanav that the defense of the United States against military threats is core, core elements of our definitions, but I also think that the approach to defining our national security has to -- and I think most people who specialize in national securities issues accept this -- has to take account of the fact that the world is not static. And to take it down to the China case, it has to take account of the fact that the China, as I said on my testimony, the China that used to pour the tea when the great powers got together is, unless there's some sort of internal implosion, a China that we will not see again in our national lifetime, at least in our personal lifetimes.
Therefore, the national -- the concept of what our national security is with regard to China has got to be one which takes into account not only a threat, of whatever definition the Commission or any individuals choose to adopt, but also the need to maximize the benefits and the advantages of a different reality, a reality in which the Chinese people in fact have disposable income in which they're becoming, although they're not quite there yet, a middle income country in which they in fact do have tremendous potential and increasingly actualized productive capacity which may change the equation of global resource uses and global economic distribution.
Somehow the definition of national security has got to grapple not just with the concept that this China which seems, at least for the most moment, more or less staggeringly to have gotten its act together after 150 years of dissolution, is partly a challenge and partly an opportunity for us.
COMMISSIONER WESSEL: Mr. Trumka?
MR. TRUMKA: Thank you, Commissioner.
First of all, when you consider national security I would urge this Commission to look beyond just a relationship between the U.S. and China, and I would urge you to consider this. Consider what affect China's unfair trade advantage, gained through violation of worker rights and human rights and forced labor and child labor, threatens to destabilize other countries in the region. Countries like Korea, who immediately after PNTR was voted on voiced the following concern: How do multinational corporations are only turning China into a low wage production base. How can Korea, with its high wage structure, compete with China?
So consider that advantage and how the affect it has on other countries, countries like Cambodia and even Mexico, who are now losing manufacturing facilities in the Mequilladera area to China because of this unfair advantage.
I would agree that you should look at the physical security when talking about security, as well as the economic security. Physically if you look at our trade picture with China that's the trade deficit that we run. I wish it were this way, but it's this way, and the question is each year with this deficit you continue to put billions of dollars into the hands of this government and what do they do with it. I mean, that's a decision that we have to make.
Now, do we suggest for those who would misconstrue what I'm saying that we don't have trade? No. Again, it's how do we do it and how do we manage it better so that we can protect ourselves both physically and economically.
Now, economically my testimony goes through a number of things. We assume frequently that just having businesses there, American businesses will raise the wages and have this wonderful treatment. There are three or four examples in my testimony about workers making Kathy Lee handbags for Wal-Mart or people work 12 to 14 hours a day, seven days a week, one day off a month. Yet after months of work 46 percent of the workers actually owed the company money, and then whenever the workers protested those conditions about 800 were fired.
Nike workers who done the same thing, make 8 cents an hour -- the New Balance sneakers, they were fired. And I think the thing that bothers me the most about the economic security is the American Chamber of Commerce in China actually advised the Chinese government to cut labor costs because the high labor cost has already discouraged some potential investors.
So the notion of trade with China can be a good thing, but not if it's unfettered laissez faire, and American corporations, if not pressed, if not bridled, and if not made to live by a code of conduct, won't and this is classic examples of how they sink to the lowest common denominator and the Chinese government actually helps them.
So when you think of security think about the destabilizing affect of all the countries and the advantage they get from these type of conduct whenever you come up with recommendations.
CO-CHAIRMAN MULLOY: Now, we're going to turn to Ambassador Lilley.
CO-CHAIRMAN LILLEY: I have one question for each of our speakers. I think you contributed a great deal to our knowledge.
Mr. Trumka, you imply that you would like to see a linkage between trade and human rights in China. You are, of course, aware we tried this in 1992 and '93, '94 and it was a disaster. We had to back off, put seven conditions on China, public conditions, and it didn't work. They say once bitten twice shy.
And I would say the other thing that we did, we were absolutely isolated in the world. Nobody supported us. They felt we were out of our minds.
I lay that before you because I think if we don't understand history we're going to make the same mistakes again. I think this was a mistake.
MR. TRUMKA: First of all, it is good to know history, but frequently whenever something happens you don't have to vacillate 180 degrees in the opposite direction and pretend like because something wasn't perfect that you totally abandon it and never go back to revisiting it.
If you look at the European Union they are putting conditions on trade that they're doing with China. They're managing their trade with China a whole lot better than we are. They don't have deficits, they have surpluses. They don't assume that things are going to happen, and they would join us, I believe, in pressing for human rights and pressing for worker rights protections, and actually pressing their corporations. I advocate pressing U.S. corporation that go there to help us change these conditions as well and to link them together. Yes.
CO-CHAIRMAN LILLEY: My question for Mr. Benanav. You are quoted as saying in November 1999 to WTO, that 1 percent of China's insurance market would double New York Life volume.
MR. BENANAV: Correct.
CO-CHAIRMAN LILLEY: This sounds a little bit like an old statement about Manchester Mills running forever by adding two inches on each Chinese pair of pants.
This is not reflected in Charlene Barshefsky's testimony on the insurance business. Would you indicate why you think this is going to be such a boom? I'm not sure AIG has achieved that level of doubling their volume on the basis of their sales in China.
MR. BENANAV: Well, they certainly haven't in the short time they've been there. If you look at the proclivity of the Chinese population to save, the average Chinese family saves about 1/3 of its income. The average American family, if we're lucky, saves 5 percent of their income. Many of them actually don't save anything; they have negative savings.
So the Chinese population, while much, much less wealthy than the American population, tucks away a lot of money in banks and literally in mattresses. If the middle class in China grows, as we believe it will grow, there's a huge pool of savings. It's not going to happen in five years. It's going to happen over a period of 20 years, but the accumulated capital, accumulated personal savings of the Chinese population can become quite enormous and life insurance, as we see through our sales in the U.S. to Chinese families, life insurance is a very, very useful tool for them to save.
I'd like to also just give you a little answer to your first question. We agree that the United States should continue to press China -- Chinese entities to move ahead with human rights and to move ahead with worker rights. So there is no disagreement, I believe, at this end of the table. The only question is how. The Chinese are very proud people and you can get a lot more done sometimes on sensitive issues by pressing in the back room than having them lose face in the front room.
Time and time we've learned that you will get a lot more accomplished by pressing -- and the Administration needs to do it, many organizations of government and business should do that. The pressure has to be brought in the right way.
I don't think American businesses need to be pressed. I think American -- 95 percent of businesses operating in China have the kind of values that you'd like to see us have. Sometimes subcontractors and organizations that are not under the direct control of U.S. businesses do engage in activities that none of us like, but I think 99 percent of American businesses behave the way you'd like to see them behave, and Chinese workers are aware of the behavior standards of American firms, and they flock to work for American organizations for that reason. Their friends find out what's going on with American standards, and it will take time, but they too will require those kinds of conditions.
CO-CHAIRMAN LILLEY: Well, you're preaching to the choir on why diplomacy is a more effective way of getting things done.
My old friend, Dr. Bob Kapp, is always stretching our minds with these intellectual challenges, but don't you think that in your reading list that you could probably benefit by the works of Michael Pillsbury on Chinese views of warfare or Mark Stokes on Chinese technical acquisitions rather than relying on Owen Harries and Bob Ross and Andy Nathan? I think you need some balance in there.
MR. KAPP: Well, Ambassador, as I said, one of the reasons that I put in the ones I did was that I felt they represented that very balance, and I have not a doubt in the world that this Commission will be made well aware of the writings of a great many people that I didn't put on this list, including those you mention.
I don't myself have a complete take on the way in which you interpret everything that needs to be properly interpreted. The question of how one interprets what one reads is very much a part of this whole issue. Certainly, if the Commission wants to read the works that Mr. Pillsbury has published in the sense that he's translating writings of Chinese military figures as to their calculi of the future possibilities of conflict with the United States and other military conflicts in the world, it's out there for all of us to see.
Commissioner Mulloy, just let me say on the matter of the Europeans, I'm not a European trade specialist. I simply tried to call up a few items up online. My understanding is that the Europeans are running a significant and growing trade deficit with China. Senator Sarbanes, I believe it was, said earlier that they're not running a surplus.
At the same time, if you read the rhetoric from the EU at least, the rhetoric is all the rhetoric of engagement, assistance in training, and investment in bringing China more and more rapidly into the full mainstream of economy, accepted commercial, and other practices.
CO-CHAIRMAN MULLOY: Thank you, Dr. Kapp.
I remember Senator Sarbanes' testimony was in the context of overall trade between Europe and the Chinese, that they were -- Europe was running a deficit. It wasn't nearly as large as the deficit of America and they actually have more exports to China than we do, in the total context.
If I could call on Chairman D'Amato.
CHAIRMAN D'AMATO: Thank you, Chairman Mulloy.
First of all I want to commend the witnesses for their testimony. I had the opportunity to read the testimony carefully. I was impressed with the thought, the effort that went into all the testimony.
Mr. Trumka, I thought you T'd up a lot of issues that are really critical to this Commission's mandate. It provides kind of a menu of things that we need to be looking into.
And, Mr. Kapp, I thought your testimony was very thoughtful. You're obviously a real student of this relationship, and you talk about the need to maintain a dialogue with us. We'd like to do that with your group. We think that what you do is important. I was afraid that by the time I got to the end of your readings that we would end up with a very long pop quiz, and then we'd have to put off this hearing until we got the answers to you. But in any case, we want to thank you for that.
CHAIRMAN D'AMATO: You know, we talked about history here. I can remember, Mr. Trumka, that many years ago when I was working for a senator who has since died, retired and died -- Senator Abe Ribikoff. And we worked together, closely together with other senators like Scoop Jackson and the Administration in those days, and we put terrific pressure regularly on the Soviet regime on human rights, and we used our economic influence on that government all the time to try and bring about the kinds of things that you mention, to bring leverage to try and change their behavior.
We didn't change the Russian regime, but I can remember going to the Airport and picking up Mr. Sharanski and that guy came out of there as a result of the pressure of this body, this government on the Russian government, and he would have remained in prison and died in prison had we not exercised that leverage.
So I read history a little bit differently. I think that we made some differences. Maybe you call it out on the margin, but they were important differences for the world. We held ourselves out to use that leverage and we were successful in many respects. I can remember when Solzhenitsyn came out. I was involved with helping him relocate in Vermont. We worked with his wife to bring Sharanski out and others, and this man had been in prison in Russia more than 40 times. We escorted him to Senator Ribikoff's office and we put him in a chair so that he could see all the doors from that chair. Here's a guy who had been beaten up, and the kind of experiences he had was a reminder to us of what we stood for.
So I have a question in this respect, and that is who is the world has been using any kind of leverage on the Chinese regime in this area of human rights, which is every bit as egregious as what the Russians did to their people? And if it's not going to be us is it going to be anybody else, and are we abandoning that? Do we want to abandon that kind of pressure, to use economic pressure, as you point out in your testimony, to try to build a model or move the Chinese a little bit in the direction of the values that we care about, at least make it clear to them that we really care about those values?
I think that's -- it's not meant as a criticism of anybody. It's a question I have. I'd actually like to ask Mr. Kapp, how do you feel about that? You're a student of this stuff. Is it we can only bring about limited change, but is it worth trying and is there a message out there when we don't try?
MR. KAPP: Well, your last subclause is a very important one about life in general. Sometimes the things you don't talk about turn out to be more important because you didn't talk about them, and we in the business community have been trying to say that to our friends in the business community as they meet with people in public service these days. This is a time when the U.S.- China relationship is in a very parlous condition; it's gone through another series of jolts. We've been saying it's important that we remind our public service friends that the stability of this relationship is important, because if we don't say it out loud it's possible that people will say we don't care. So I think on the matter of human rights you've raised an important question at the very end there.
You know, one of the dangers in all of these superheated discussions on China is that if one says something that coincides with something the Chinese; one is labeled as their spokesperson and in fact as their lackey. That leaves one with a certain degree of diffidence. But let me just say that the economic and material well being of the populace is not a small matter when it comes to definitions of human rights for the Chinese people, and I don't think you have to be a spokesman for Beijing or a lackey of Beijing to point out that these have improved significantly; few people would doubt it. Admittedly, here are growing disparities of wealth and income become the coastal areas and the poorer interior and so forth.
Second of all, I go back to testimony I offered to the House as the Ways and Means Subcommittee years ago. I'm not a fan on “sending messages”. I even put that in my testimony here. I hope that didn't seem impolite or disrespectful to the Commission. I think “sending messages”, to the extent that it proves that you've sent a message, is not particularly productive and that, in fact, with China, as perhaps with other countries, it is sometimes unproductive. Just to say, “We told them how the cow ate the cabbage,” and report back to your colleagues that you've done your work, I think, does not serve.
So then the question is what really makes a difference? I tried to say years ago in testimony it is not a moral achievement to take an action in the name of morality if you don't take into account the consequences of the action. The case in point was cutting off MFN in the name of human rights, back in the days when NPR was called MFN. If you cut off MFN in the name of human rights or in the name of religion, which was the issue in 1997, and you then discover that in fact the practitioners of their faith are labeled as pawns of a hostile United States, because the United States cut off China's ability to reach U.S. markets in their name and suffer the consequences, to me you have not taken a moral action.
I don't mean to sound like I'm simply equivocating here, but I do think you have to be sure that the actions you are going to take really are going to make a difference.
Now, there are moments -- there is room for symbolism sometimes. But I come back to comments that a Chinese dissident made on the Web last year in the weeks before the May 2000 House vote on PNTR. He pointed out there's a sort of game that the Americans and the Chinese play. He put his view very crudely. He argued that the PRC regime is like a robber in the night. It seizes people and throws them in jail. The Americans get all upset. There's a big negotiation, the public is furious. They let a few people out. The Americans claim victory. And the system doesn't change.
These were the views of a man who spent years and years in China’s “Laogai”, or labor camps. He's testified before Congress about his experiences.
His point was that the real answer to these egregious human rights conditions that I think few of us would for a minute deny, lies in long-term systemic change, which is in fact best served by the raising of economic standards and the full integration of China into systems designed by the world to which China must submit.
Now, he was talking in the context of PNTR. But what I'm trying to say is that I'm not sure that punitive actions by the United States, especially if they're unilateral and the Europeans and the Japanese and others do not join in the punitive sanctions are the most effective way of trying to achieve these goals that I suspect everybody in this room would share.
CO-CHAIRMAN MULLOY: Now we turn to Commissioner Robinson.
COMMISSIONER ROBINSON: Yes. Thank you, Mr. Chairman. I have just a couple of quick questions for Mr. Trumka.
First, Mr. Trumka, the AFL-CIO and I think you personally, were actively involved in opposing the initial public offering of stock of Petrochina last year, which as you know was ultimately downsized from an originally targeted amount of some $10 billion to $2.89 billion. I was wondering if you could share the view and position of the AFL-CIO to the likely prospect that in the next few years scores, if not hundreds, of Chinese state-owned enterprises will be seeking to come to the U.S. stock and bond markets to raise billions of dollars. Do you have a view on that likelihood?
MR. TRUMKA: Yes, I do. First of all, I'd also like to note for the record the assistance and the working relationship that we had, yourself included, in the IPO.
I would start off by saying that the IPO in the United States was represented by Goldman Sachs, and Goldman Sachs' initial advice to the Chinese government was that people will invest in your oil not in your people. So they separated into two corporations, their assets and their people. Had that IPO been totally successful it would have resulted in the layoff of approximately 1 million Chinese workers. We obviously thought that was wrong from many, many different levels.
Then we did a straight economic analysis of the deal itself, and when you read the very, very fine print in the back of it you were -- investors were being asked to buy a 5 percent share in the government owned oil company, and you had virtually no rights because shareholders' rights in China are nonexistent. And in fact, there was a little paragraph that was tucked in page whatever, whatever that said we will probably never achieve our business plan because political politics in this country will forbid us from letting that happen.
We thought it was a bad deal for investors. We thought it was a very bad deal for people, and we organized roughly a little over 2 trillion dollars in money to say no to that IPO. They had planned 124 other IPOs, I believe it was, at that time that were scheduled to come down the pike. Their lack of success or overall lack of success with the Petrochina deal dissuaded them. I don't think it eliminated the threat, it just slowed it down. I think they're regrouping and I think you'll see them come back in a year or so with another IPO and try to come at it with a different point of view.
COMMISSIONER ROBINSON: Was it the first time that the AFL-CIO had ever sought to leverage the U.S. capital markets to advance your organization's objectives? I mean, it's my recollection that that was the first time that AFL-CIO had ever engaged in that area.
MR. TRUMKA: The only thing that I would correct is that it wasn't the AFL-CIO's objectives; it was shareholder objectives. It was the first time that we took the lead in speaking out on behalf of shareholders saying this is a bad deal from any point of view.
This company invests in Tibet. There were Tibetan monks that came and talked about how they were tortured with electrical devices. This monk pulled out an electric shocking device that he was tortured with. The money would have been used for that, and so it was our thought that we should not be using workers pension money in that type of an investment, an investment that ultimately, as I said earlier, would have resulted in the layoff of 1 million Chinese workers.
COMMISSIONER ROBINSON: And one final question.
Are you familiar with the new SEC disclosure requirements that were made public in a correspondence of May 8th of this year from Acting SEC Chairman Laura Unger to Representative Frank Wolf?
MR. TRUMKA: Yes.
COMMISSIONER ROBINSON: Does AFL-CIO support those new disclosure requirements that pertain to foreign registrants in our markets doing business with U.S. sanctioned countries?
MR. TRUMKA: Yes. We think it's a step in the right direction, although I point out one think that's just come to surface, one way those rules can be circumvented. One of the public funds, trust funds wrote to a company by the name of Armana-Hess, who has a subsidiary -- well, I should say they're a 25 percent owner in an oil company called Premier. Premier does significant business in Burma. They were pressed on the issue and Armana-Hess' response was, one, we have instructed Premier that none of our money that we invest in them can be used in Burma; and two, the two directors that we have are instructed never to speak of or participate in any issues of the company dealing with Burma.
Now, that will be their response to avoid the disclosure because the rules, I don't think, address that, and if anybody believes those are true I have ocean front property in southwestern Pennsylvania I'll sell you at an easy price.
COMMISSIONER ROBINSON: Thank you, sir.
CO-CHAIRMAN MULLOY: Thank you. Commissioner Becker.
COMMISSIONER BECKER: Thank you, Mr. Chairman.
I have a couple of questions that would perhaps follow-up questions on what's already been covered to Mr. Trumka, although I would certainly welcome comments from Mr. Kapp and from Mr. Brenanav on the same subject.
In your written testimony you make reference to the fact of the almost inevitability of China's accession to the WTO and PNTR and comment about how our options here in the United States deal with some of the problems that you've raised, some of the questions that we've talked about here concerning human rights and repressed labor rights, to deal with those subjects.
Would you have any suggestions that you could offer yourself as to how we could strengthen things in the United States in order to deal with issues like human rights and the repressed labor as a comparative advantage against workers here in the United States? And I have a follow-up question if time permits.
MR. TRUMKA: Many of the rules that the Chairman talked about or many of the tools that we had back then have been eliminated. WTO prevents -- doesn't cover forced labor. WTO doesn't go after child labor, but what we can do, I think, and what we should be doing as I said earlier, is one, pressing the Chinese government; and two, pressing American corporations.
Now, we don't know exactly what percentage of their world market we are. It's between 25 and 50 percent. I refuse to believe that with that kind of economic power that there aren't leverage points that we can't find that force them to move. And forcing corporations, pressing corporations because as I told you, the American Chamber of Commerce in China asked the Chinese government, told them to lower wages because it's dissuading investment there. That's not the direction to go.
Now, in addition to those things we can pressure both of them through public hearings like this one, like consumer educational campaigns, and even some trade actions. And things that I think we should consider is we can bring a Section 301 Trade Act of '74, 301, a case against China for their unfair trade practices, including the egregious violation of workers' rights.
Now, I don't know whether this will withstand a WTO challenge or not, but it's worth trying because it at least brings attention to the area that we're in. And even under WTO rules we have the right to restrict the import of goods produced by prison labor. Now, they're refusing to let us monitor those goods. We should be pushing them to absolutely open up and say we have a right under these rules that we've already negotiated to monitor them. Let us monitor them. Let us find out.
Just last year it was found out that a U.S. company was importing -- you know those little black paper clips with the silver thing that they get wider and everything? Well, those were being contracted out to a prison facility.
We have to aggressively monitor the situation and then use all the trade remedies at our disposal to address it effectively.
And, Mr. Chairman, in response to both your questions, a point that you raised. If not the U.S. government who? If not the U.S. government nobody, because there's an inherent contradiction with American corporations. When they're on the ground in China and they have a chance to lower wages what will they do? They'll ask people to raise wages? They've never done that in the United States. I mean, there is an inherent contradiction and we confuse the difference between the freedom of multinationals to do business with the freedom of people in China to get democracy and do business. And we have to press them and press the Chinese government to continue to make those changes. Unions are still illegal in China.
MR. BENANAV: Can I give you a reply? I think the question was if not the U.S. government who. I think there's a very good answer for that. If not the U.S. government, the Chinese people. I do believe that the government has a role to play here, as I said before, in quiet diplomacy, but I think that broad-based human right advancement, labor right advancement will come because the Chinese people ultimately demand it.
I've been going to China since 1983, and I'm not sitting here telling you things are wonderful in every respect. But if you look at China in a historical context, the progress that has been made from the time that I've been going there to today is really quite dramatic. Is it where we'd like it to be? No. Will it go further? I think it will. And as the Chinese people, as the middle class rises, as the education level rises, as they're exposed to American values and Western values the Chinese people will start to demand the kind of rights that we want.
If we look at our own history in the United States we didn't achieve this level of human rights and labor rights in a five-year or a ten-year period. It took us 200 years to get to this point, and for us to expect the Chinese to reach the same level when we snap our fingers is unrealistic. Greater pressure will come from the Chinese people. Not to say that we don't have a role to play in it, but our biggest contribution can be the assistance to the Chinese people to raise their middle class and their education levels.
COMMISSIONER BECKER: It would appear, that the only defense that we would have in the United States then, would be our trade laws, and either enforcement of trade laws or improving the trade laws in order to deal with what is obviously a comparative advantage waiting for this 20 or 30 years for the Chinese to evolve up to a level. Is that not correct?
MR. BENANAV: We, the business industry, will be very aggressive in making sure that whatever laws and commitments are made are followed by the Chinese, that they live up to their commitments and we will want to see that. But our greatest weapon -- and I think this was true in the Soviet Union and Eastern Europe. Our greatest weapon is education. When a population becomes educated and understands our values that's a much more effective weapon than an occasional action in front of the WTO.
If you really want broad gauged advancement in human rights and labor rights, we have to capture their hearts, the hearts and minds of the middle class. We did that very successfully, I think, in Eastern Europe and even the Soviet Union, and the walls came down not because we forced them down, because the people did, and that's what we need to do here.
CO-CHAIRMAN MULLOY: Commissioner Becker, if we can move to the next questioner. Let me point out that if any witness feels that there are additional points that he wishes to make and you don't have time to do it now, please at the end of the panel, if we have additional time to do that, or you can send them in writing. But we've got to give each Commissioner his opportunity.
Commissioner Bryen.
COMMISSIONER BRYEN: Thank you, Mr. Chairman.
My questions are for Mr. Benanav and Mr. Kapp. They're easy questions, I think.
In your presentation this morning, which was very interesting, neither of you talked about the trade deficit. This morning when we had the senators present, they talked a lot about the trade deficit, and it seems there's growing concern about it, that it's getting worse and worse.
My first question is about the trade deficit. If this relationship with China is such a great thing how come we're taking it on the chin in terms of the overall trade relationship?
MR. BENANAV: Well, one of the reasons why I think PNTR makes great sense and having China come into the WTO makes great sense is that the other half of the trade deficit, our ability to export is significantly enhanced. China's had NTR status for over 20 years. We have been foreclosed from many of the Chinese markets while NTR was available for them to import. By getting them into the WTO and by getting them to sign the agreement the ability of American firms to export to China will be significantly enhanced. Agriculture, financial services, even many manufactured goods that could not be imported into China will now be available for imports into China.
So I see PNTR and WTO accession as a help to the trade deficit. Certainly not a harm because the Chinese a year ago had the same rights to import that they will have a year from now. They don't get any additional rights to bring their goods into the U.S. after WTO than they had before WTO.
The only tool we really had, if you wanted to fix the trade deficit with China quickly, was to not renew their trade status, their NTR status. That is such an -- that's like dropping an atomic bomb in economic terms, and we didn't do that even in the year of Tiananmen Square. So I consider that a totally unrealistic weapon to use against the trade deficit.
COMMISSIONER BRYEN: Mr. Kapp?
MR. KAPP: Well, in my written testimony I spoke to it and I included some materials both by me and by our counsel and also by a gentleman who wrote an article in the Foreign Affairs on the subject.
COMMISSIONER BRYEN: In your spoken testimony you didn't.
MR. KAPP: We have a big merchandise trade deficit with China. It's growing. It's not as big as it's said to be for important reasons that are not trivial with regard to how you count the deficit.
There are issues of substitution of production. Taiwanese investment -- Taiwanese exports to the mainland since 1992 have risen 401,000 percent, according to Taiwan statistics. It is, I think, a small reflection of the fact that Taiwan, Korea, Hong Kong, and other nations that used to send experts straight to the United States are investing in production on the mainland for that purpose.
COMMISSIONER BRYEN: Oh, I understand that. I'm trying to get to a different bullet.
MR. KAPP: I'm sorry.
COMMISSIONER BRYEN: Which is --
MR. KAPP: And you know that China's merchandise trade worldwide is nearly balanced. You know that the United States has a $5 billion surplus on the services account. None of these eliminates the fact that there's a big deficit, and we also know that even with the market break throughs that we've worked so hard to achieve through negotiation and look forward to realizing, U.S. exports to China would have to grow five times as fast as U.S. imports from China in order to even start reducing the trade deficit. So there's a structural issue there which is very serious.
COMMISSIONER BRYEN: That works against us.
MR. KAPP: Well, it certainly means that the trade deficit is -- the merchandise trade deficit is not going to come down overnight.
But on the question of why we are “taking it on the chin”, to use your words, some people would argue that taking it on the chin is not a complete description of the reality here. This will not be accepted by everybody on the panel, but some people would argue that the presence of low-cost Chinese manufacturing and the exporting of low-cost goods to American markets helps keep consumer prices and cost of living increases down in the U.S. COMMISSIONER BRYEN: Some people would argue that if we don't export, our economy suffers a great deal.
MR. KAPP: Absolutely right. That's why we fought so hard in the WTO.
COMMISSIONER BRYEN: Exactly. Countries like Japan -- and that was my second question -- do considerably better than we do with a profile that's not terribly different than ours. They do considerably better than we do in terms of exports to China. Why?
MR. KAPP: I'm surprised it's taken us so long in this hearing to get me to the point of saying I'm not sure, because I certainly have felt that from the minute I walked in the door. I really don't have a full answer to whether or not it is a function of government dominated decisions, which are getting fewer and fewer by the day I might say, to prefer imports from one country over those from another; whether it's a function of particular kinds of Japanese products that compete successfully against American products; or whether the Japanese are in some cases selling into China products, for example, for TB tube manufacture or other things that they've invested in which we no longer sell at all.
I can certainly do my best to come up with a better answer than that.
COMMISSIONER BRYEN: I would like you to do that, because it seems to me that there's such a big disparity, so significant, and we seem to be getting a greater trade deficit. We're not making any improvement. So I'd like to see what you come up with.
MR. KAPP: Mr. Chairman, if I can take just one more second with Commissioner Bryen.
Many people would argue instantly on the question of the disparity between Japanese imports and exports; imports from, exports to China. Many people just snap their fingers and say oh of course, the reason is that the Japanese let fewer Chinese goods into Japan. It's not necessarily a question only of the Japanese having greater success in Chinese markets than Americans, but also that they may be having a better success in keeping Chinese products out.
MR. BENANAV: I think part of the answer is the Japanese firms have been at this a lot longer. They work much harder at export businesses than American firms. American firms have the luxury of having a huge domestic market and many of them just don't -- have not seen China as a place where they can make a lot of money, and I think as American firms become better at exporting and learning how to do business in a very difficult place you'll see our exports rise. The Japanese have invested 50 years in this.
COMMISSIONER BRYEN: But right now we're not. I mean, right now we're seeing the reverse so that where we're at now the trend is negative. Japan has $34 billion worth of exports to China compared to our, 16.1. That's a big difference and the base here is quite different, so it's very worrisome that all the celebration of the trade relationship that we hear, on the other hand the performance isn't there, and that's the point I wanted to get at.
CO-CHAIRMAN MULLOY: Mr. Trumka, you wanted to add something?
MR. TRUMKA: I really do, because I think some of the answer to your question, Commissioner, was contained in the Wall Street Journal the day after the PNTR vote, and some of what I believe is a difference in philosophy and approach. The Wall Street Journal said the day after PNTR this deal is about investment, not exports.
U.S. foreign investment is about to overtake U.S. exports as the primary means by which U.S. companies deliver goods to China, and here's a list of companies that have closed down production facilities and have gone to China. Zebco, Innovative Home Products, New Coat, LaCrosse Footwear, it goes on.
The difference is China is that they're going to produce at home and send a product. Our philosophy is to shut down at home and send a factory, and the more factories we send the worse the deficit is going to get.
Two experts haven't told you, haven't given you a glimmer of hope about that deficit reducing in the foreseeable future, and it's going to grow. It's a difference in philosophy; move a factory, not a product.
CO-CHAIRMAN MULLOY: Okay. Let me just -- Mr. Kapp, you offered to help us in terms of analyzing that. And part of our statute is to analyze that point, so if you could help us with relation to China’s trade surplus with Europe and Japan that would be enormously useful to us.
Commissioner Reinsch.
COMMISSIONER REINSCH: Thank you very much.
This is an interesting panel. You've just laid out the dilemma that the policy makers have. Everybody wants to get to the same place but you have very different ways to get there. I think it's helpful for you to lay that out.
I just have a couple questions that I think will help me just aggregate some things and understand some of the points you're making better, and my first question is for Mr. Trumka.
If the Chinese did all the things we want them to do in the human rights, worker rights area, the various things you identified--and I think it was clear on the panel that everybody is in favor of correcting those things--how much difference would it make in the bilateral trade deficit?
MR. TRUMKA: A significant difference because while there would be less of an incentive you wouldn't be able to pay 8 cents an hour to produce Nike bags and backpacks. You'd produce them at a higher rate, there would be less incentive to go there. We'd send the product over there rather than the factory.
COMMISSIONER REINSCH: Can you -- not necessarily now, but can you later on quantify for us what you think the net effect on the deficit would be and submit some data?
MR. TRUMKA: With assumptions, sure.
COMMISSIONER REINSCH: Yes.
MR. TRUMKA: Absolutely.
COMMISSIONER REINSCH: Mr. Kapp, do you agree with Mr. Trumka's position?
MR. KAPP: Well, I would say first of all that I tried to suggest in my testimony that American companies invest in China for many reasons; one of which is the emergence of a very large and rapidly growing Chinese market. In many, many other countries around the world, American and Japanese and European firms invest in the country where the market is for reasons of better effectiveness in addressing that market.
So I think it is important for the panel to keep in mind the fact that corporate decisions on where to invest and what to make when you do invest, and whether to do a joint venture or a wholly owned and so forth are not unidimensional decisions.
On the matter of the 8 cent labor, I understand that the minimum wage in China is now 200 RNB a month by national law, and if you calculate that out at some reasonable level or hours or even more if it's an unreasonable level of hours, the number gets down to a very low per hour unit of compensation.
It would be worth the panel's asking, however as it looks at the endeavors in which U.S. companies do commit investment in China, whether those endeavors are the 8 cent an hour endeavors. The nearest you will come, I believe, is probably going to be textiles and apparel or possibly textiles, apparel and shoes.
But American companies are not investing, in shoe factories and textile plants. Some U.S. firms arrange for such production through, as you know, doing it through sub-contractors and so on. But if you look at where American companies are themselves investing in China I think you're going to discover that they're not investing in the kinds of production that utilizes that lowest of the low end of Chinese labor.
Are they going to China only for the labor costs? Some may, but a lot do not. I think everybody understands, again, that there is a mix of reasons that international investors and put money into other countries, whether it be China or India.
That leads me to the last point on this, and that is I do think it's important for this panel, as it asks itself these China questions, to ask whether they are China-focused questions or generic questions. If you're talking here about broad issues of capital flows in the world, or broad issues that involve developing countries, or broad issues of countries that pay workers less than they might receive in the developed industrial states of Western Europe and the United States, then it's important not to come up with conclusions speaking only of China that are misdirected simply because China is the mandate of the Commission even though the real issue is actually a much broader subject.
COMMISSIONER REINSCH: Actually I'm glad you made that point, because it seems to me that the Chinese are pursuing a set of economic strategies that are not unique to them, either historically or right now, and which in some respects are wise for them. They are not necessarily wise for us, which I think a lot of you have made clear. But it would be nice to sort out what is unique about China as opposed to what is the same about China and what a lot of other countries are doing. As someone who was a veteran, as were Mr. Trumka's predecessors and Mr. Becker's predecessors of the trade wars with Japan in the '80s when an awful lot of things were said, some of them the same that are being said today, although that's not a problem that we seem to be worried about as much today as we were then despite the size of the deficit. It seems to me the Chinese are doing a number of things. As far as their economic development is concerned it's pretty much the same as what the Japanese did, albeit not with respect to the points that Mr. Trumka made.
And that's why I asked my first question, to try to sort out the differences here and figure out what we need to do to attack the question that the senators raised, which was the deficit. Mr. Trumka feels if we attack some of these moral issues, for lack of a better term, that that will get us there, and I was trying to get a sense of what you feel.
Not unrelated to that, Mr. Benanav, you made a comment, which I agree with about the extent to which Americans present in China uphold higher standards of behavior, if you will, and I accept that comment. I haven't heard other people refute it, although I think Mr. Kapp's comments about the contractors are well taken and bear separate investigation. But in that case, with respect to direct involvement, would you object to a code of conduct, the Sullivan Principles, if you will, for corporations operating in China?
MR. BENANAV: For American firms doing business there?
COMMISSIONER REINSCH: American firms with respect to their behavior.
MR. BENANAV: I honestly don't feel one is necessary, because I think that American firms by and large -- as I said, 99 percent of them adhere to those principles anyway. I think the more we add bureaucratic requirements, reporting requirements for a purpose that's not really going to be very valuable because it's already being done, it's not a very good idea. I just don't see that American businesses go into China the way Mr. Trumka sees just to take advantage of the 8-cent an hour labor. I think they treat their workers pretty well, and I don't think the Sullivan Principle will add anything.
COMMISSIONER REINSCH: I assume, Mr. Trumka, that while you would say that such a code would probably be a good thing, you would also say it's not enough; is that right?
MR. TRUMKA: I would say that because it would have no teeth, although the reporting -- if there were significant reporting requirements that could be an interesting thing to allow us to know. And I point out to my colleague to my right that if he thinks everything is hunky-dory with American corporations going over there I'll give him the White Paper that the American Chamber of Commerce gave to China and they advised the Chinese government to cut labor costs because high labor costs had already discouraged some potential investors.
Now, that wasn't some Mickey Mouse contractor. That was the American Chamber of Commerce advocating cutting a woefully inadequate pay grade in that country, and if that's the American value that the Chinese worker's going to learn, I submit to you that it will have an adverse affect on the best interest of this country.
COMMISSIONER REINSCH: Mr. Trumka, one more thing quickly.
You said in your testimony that the United States has lost 675,000 manufacturing jobs since last July, I believe it was. I assume you're not blaming all that on China?
MR. TRUMKA: No, I'm not, although the significant number of jobs were in electronics and one other market, and those are both areas that Chinese investment in China has been the highest in. We're doing circuit boards over there. We're doing computers over there. We're doing refrigerators, things of that sort from the big corporations. No, I don't suggest that all 675,000 manufacturing jobs were lost there. I suggest a number and a growing number has been lost there.
COMMISSIONER REINSCH: Thank you. My time is up. I invite the panel to submit for the record any comments you might want to make on one other subject, who is the extent exchange rates, affect the bilateral deficit.
CO-CHAIRMAN MULLOY: Mr. Trumka, there is one additional thing before we turn to Commissioner Dreyer.
That list that you gave of companies that moved?
MR. TRUMKA: Yes.
CO-CHAIRMAN MULLOY: It would be very helpful to have that submitted to the Commission for the record just in case there was a desire to follow-up and get the thinking of what went on there.
MR. TRUMKA: Very good.
CO-CHAIRMAN MULLOY: Thank you. Commissioner Dreyer?
MR. TRUMKA: Mr. Chairman, excuse me. Would you like a more expansive list?
CO-CHAIRMAN MULLOY: Yes. That would be great. Thank you, Mr. Trumka.
COMMISSIONER DREYER: I have a question for each of the panelists. For Mr. Benanav, to lead off, you mentioned that China has not yet developed the range of institutions that will enable it to meet its WTO obligations, and I wonder if you are not concerned that allowing China into WTO before it has developed these institutions is going to remove a key incentive for China to actually develop these institutions. You quote Commissioner Waldron as saying that these institutions are getting more shaky rather than more stable, and that's certainly a concern I have, that if you let the Chinese into the WTO too soon they feel they're home free and they don't need to conform to certain things because they've already got the membership.
And finally, as a follow-on for that, are you not concerned that if your insurance company goes in there, and you mentioned the demonstration effect that you hope will take place, that the demonstration effect in fact is that you are training your Chinese competition and you're going to lose out on market share?
MR. BENANAV: The first question, yes, we are concerned that the institutions are not as solid as they ought to be. We have a classic chicken and egg problem here. The advantage of getting them into the WTO is once they're in there is an enforcement mechanism. Today there is no enforcement mechanism. If they arbitrarily apply some kind of rule and do things in a non-transparent way all you can do is ask the Ambassador to intercede on your behalf. There is no way to enforce a set of rules.
Once they're in the WTO, as imperfect as it will be, as painful as it will be, as long as it will be, there is an enforcement mechanism and when that enforcement mechanism starts to take affect, as the learning starts to take affect, we believe that the institutions will be built up.
I've personally offered to send 250,000 American lawyers if they'll take them to help them with the institutions.
COMMISSIONER DREYER: We can spare them.
MR. BENANAV: That was my point. But it is not going to be easy. We're not kidding ourselves, but we believe this is the best way to get those institutions up and running.
In terms of your second question, are we training our competition, the answer is absolutely, definitely yes, we are. We believe that the Chinese local institutions will learn, and they already have learned an awful lot about how to compete in our businesses. We would certainly love to dominate the market but we know we can't. The reality is the more the competition exists and the more that competition succeeds the more we're going to see the insurance market opened up.
As I said earlier, the potential for the market is huge, but it's going to take competition to open that market up. The state-owned monopoly that had that ability for years and years and couldn't really take advantage of it was because they didn't know how to compete. Today that state-owned monopoly has got a lot of competition, it's learning new tricks, the whole industry is going to open up.
This is not a question of a limited pie where we're fighting for a piece of that sized pie. That pie has great potential to grow and competition is what's going to make that pie grow.
COMMISSIONER DREYER: So you feel that a sufficient number of Chinese are going to decide that New York Life is the company they keep?
MR. BENANAV: That's right. Thank you for the advertisement.
COMMISSIONER DREYER: I watch TV.
Question for Mr. Trumka, and actually this is in two parts too. I ask this as the daughter of two blue collar workers. Are you not concerned that there is no real growth potential for the American working class? In other words, the inexorability of jobs being exported means that we are going to find that U.S. workers have to be retrained to do something else, which may not be what they wanted to do, and that this is kind of King Canute trying to hold back the tide to try to institute measures to prevent this.
And second, you mention the need to press China on certain issues, and I wonder listening to that how you would respond to Dr. Kapp's observation that in pressing China we are often just making a statement to make a statement and it ends up being counterproductive. In other words, let us say that a Lech Walesa arises in China, and of course what the Chinese government's first reaction is going to be is to put him in jail for something or other.
MR. TRUMKA: They already have.
COMMISSIONER DREYER: They already have, yes. Good point. And although nobody quite as famous as Lech Walesa --
MR. TRUMKA: Because they gave him --
COMMISSIONER DREYER: They nip it in the bud.
MR. TRUMKA: It's tough to get famous overnight.
COMMISSIONER DREYER: Yes. And it kind of limits one’s ability to get famous. We protest and then the Chinese government says this is interference in their sovereign affairs, and then what have we really gained?
MR. TRUMKA: Well, he may be right. If we continue to give away, continue to give away every single tool other than lip service to that, and the more we give away through trade agreements the less power you have, the less tools you have available to you.
Now, look, they can't have it both ways. You heard my colleague to my right say that we really favor quiet diplomacy when it comes to workers' rights and human rights, but boy, we want them in the WTO so we can pillar and post them publicly through the WTO mechanisms whenever it deals with investor rights or intellectual property rights. Those two things are sort of inconsistent. If it's quiet diplomacy for workers' rights and human rights why not quiet diplomacy for business rights?
If it's public adversarial proceeding for business and intellectual property rights, why not for worker and human rights? That inconsistency needs to be pointed out.
Your second thing -- your first question, actually. I answered them in reverse order. Does it concern me that all of our manufacturing jobs, that many of them are getting sent overseas or away from us? Yes, it does. It concerns me dramatically because those jobs have really built the middle class. Those jobs have really been good in supporting families. Those manufacturing jobs have made America great, and the loss of those jobs has had a devastating affect on places where I came from, places in Appalachia, places throughout the United States where manufacturing was a tremendous opportunity, and it need not be that way. There isn't an either or.
COMMISSIONER DREYER: So it's not an inevitability?
MR. TRUMKA: No, it isn't. I mean, if you look at -- look at Japan. Look at the European nation, what they've been doing. They have not said in order to compete in the world we have to jettison manufacturing. They figure out a way to either specialize that manufacturing, modernize that manufacturing, make it more efficient or provide workers facilities with greater training and uplifting. That's what we should be doing. That's our strength.
Now, if we continue to give away tool after tool after tool, all you will have left is cajoling. I understand one thing, and I don't claim to be an expert about China, but I understand one thing. They understand strength and they understand weakness, and their culture causes them to interpret things as weakness and interpret things as strengths. We are better off dealing with them through strength than through weakness.
CO-CHAIRMAN MULLOY: We have to move on. Commissioner Lewis, please.
COMMISSIONER LEWIS: Thank you very much for the three of your presentations. They were really very instructive and informative.
I'd like to ask each of you, particularly Mr. Kapp and Mr. Benanav, would you be willing to make a critique of Mr. Trumka's presentation today. He gave us a five-page presentation in which he said things in his presentation like -- and I guess these facts are not disputable, but maybe you would dispute them.
Our own State Department reports that human rights have deteriorated. He said that independent trade unions are illegal. He said that export jobs generate -- exports generate new jobs, imports often displace jobs. He said that the deal is about investment, not exports. He said that the investment overseas is a race to the bottom, and he said that the denial of workers' rights in China is a standard that is deteriorating in the working conditions, and he quotes the Korean Times article.
Would you be willing to critique what he wrote to us?
MR. KAPP: I would.
COMMISSIONER LEWIS: I would appreciate it if you would do that.
I would also appreciate it if you would give us a critique of their presentations.
MR. BENANAV: You're not talking about right now, though. You're talking about submitting.
COMMISSIONER LEWIS: Oh, no. Yes.
MR. BENANAV: Sure.
COMMISSIONER LEWIS: I'm going to ask each of you some questions, and I want some really short answers because I have a bunch of questions and I only have seven minutes.
Mr. Trumka, you quoted the Chamber of Commerce. Could you give us a copy of that, the source of that?
MR. TRUMKA: Yes.
COMMISSIONER LEWIS: Okay. Number two, I don't know that this is a fact, but if in fact we knew that there's a struggle going on in the Chinese leadership and that the moderates in China want us to joint -- want China to join the WTO for the purposes of leading China into the world and the hard liners there don't want them to join the WTO and the moderates seem to be winning out, and if in fact we reject their joining the WTO it would really give much more credence to the hardliners and to the military, would that change your view about China joining the WTO?
MR. TRUMKA: I think that's an inevitability. They're going to joint the WTO.
COMMISSIONER LEWIS: But would that change your view about whether they should be allowed in?
MR. TRUMKA: It would depend on the cost for us, I guess. The short-term and the long-term cost for us. If we are to give the moderates --
COMMISSIONER LEWIS: If we knew that the joining --
MR. TRUMKA: -- short term but put us at a long-term disadvantage I would say look long term rather than short term.
COMMISSIONER LEWIS: But if we knew. Talking about Mr. Kapp's definition of national interest. If we knew that their joining the WTO would strengthen the moderates, would that change your view?
MR. TRUMKA: It may.
COMMISSIONER LEWIS: Okay. Thank you.
I'd like to ask Mr. Kapp a question. You've mentioned national security, and I think it was really very instructive how do you define national security, and the question became -- the facts came out that our manufacturing base is deteriorating. Many thousands of companies are moving, and that wages in America, until the last two or three years of the Clinton Administration, actually deteriorated for 80 percent of Americans. Is that in the national security -- does that help our national security?
MR. KAPP: I would say that the long-term deterioration of real wages does not help the national security.
COMMISSIONER LEWIS: Okay. Thank you.
Mr. Benanav, you mentioned in page 4 an open economic system -- and I think your presentations were really excellent, all three presentations.
"Open economic systems do not in and of themselves overtly lead to open political systems, but I do believe that without an open economic system there can be no hope of developing an open political system."
MR. BENANAV: That's right.
COMMISSIONER LEWIS: That may very well be. I wonder, switch and say do you believe that a non-democratic regime can have a labor union movement? In other words, isn't that equally true of labor union movements, that there can't be a labor union movement in an autocratic regime, that you need a democracy to have it?
MR. BENANAV: No. I don't agree with that.
COMMISSIONER LEWIS: Can you give me an example of where there's been a free labor movement in a non-democratic system?
MR. BENANAV: I guess I have to do a little research on that.
COMMISSIONER LEWIS: Would you please?
MR. BENANAV: Yes.
COMMISSIONER LEWIS: Because I think the labor movements are like the canary in the mine shaft, and where you have a free labor movement I think you have a democratic system.
MR. BENANAV: I'm not an expert in European history, but my recollection is that under the regime that prevailed in the 1930s in Germany there were labor unions.
COMMISSIONER LEWIS: Was it a free labor movement? You see, what I'm getting at is Korea as an example. I was first in Korea in 1963. I was first in China in 1979. The Korean labor movement is a strong labor movement, and therefore there's a strong middle class in Korea, so they're buying our goods. If you don't have a strong middle class the country can't buy our goods.
MR. BENANAV: I agree with that.
COMMISSIONER LEWIS: Okay. So that's why I think labor movements help build middle classes, but I'd like an example from you if you can give me one.
Yes, Mr. Kapp?
MR. KAPP: Commissioner Lewis, on the matter of whether declining real wages are in the interest of national security, the only thing to add to that this is connected to productivity too. Real wages are not just a function of how much the person takes home and puts in the bank every week.
COMMISSIONER LEWIS: I understand that. It has to do with the standard of living. I understand that, yes.
I want to ask one last question. On the military build up that the Chinese are now undergoing, with the $85 billion surplus that they're running with us and tapping into our capital markets, do you believe, as has come out in some of the prior facts, that we are helping with their military build up with this great surplus they're running with us?
MR. BENANAV: I think the Chinese military build up is completely independent. If they want to build up their military they can do so whether or not we have this huge deficit with them. I think it's more a matter of their national interest rather than how much money they have. They have the complete ability to channel money into private sector, military sector, and they will do as they please regardless of the size of the deficit.
MR. TRUMKA: I think that the money that we give them absolutely gives them the opportunity to do more in that build up than they would without it. If they were running a deficit to us that would be $85 billion that wasn't available for military build up that was coming to us.
The other thing that I might ask the Commission to look at is the Chinese government -- the Chinese military has its own companies that do business right here in the United States under the name of Narenco. They make a profit everyday off of Americans and they send that directly back to the military.
MR. KAPP: Let me just urge the Commission to not to enter into this subject without some very well-informed thinking. The assumption that every dollar in hard currency that is earned by Chinese companies goes into some sort of a pot which is managed by the seven men on the Standing Committee of the Politbureau and thenceforth doled, out to the PLA or the Ministry of National Defense of the Central Military Commission, is misguided and hopelessly polemical; simply won't stand up.
Do not, without doing your own serious research yourselves, accept the casual claim that if there's a $50 billion deficit, or whatever the number is, between the United States and China, that's 50 billion that goes right up to Jiang Zemin and his six colleagues, and straight over to the Central Military Commission. And that once it gets over to the Central Military Commission, it's all used for things other than barracks and food and uniforms and so forth and so on.
There are many, many, many nuances in here, about which a Commission like this has got to inform itself albeit not in this session, if it is to speak with authority. Once again: the research is available; I urge you to read it.
COMMISSIONER LEWIS: I want to thank the three of you again for your very thoughtful presentations and if, in critiquing Mr. Trumka's presentation, if you want to also take a look at Kevin Kearns and critique that also, I welcome that also.
CO-CHAIRMAN MULLOY: Well, thank you, Fellow Commissioners, for being so cooperative in the time frame we've stayed within and I want to thank this panel very much. I'm going to refrain -- you know, I'm the only one who didn't ask questions. I'll refrain from doing that because both of our next witnesses are here and we don't want to delay them. If it would be feasible, I would submit those questions to you for the record, and if you could give us responses.
And finally, I want to offer again the opportunity, if there are additional things that you want to do to add to the comments you've made, please feel free to do so and they will be included in the record of the Commission. But thank each of you for being here today and for your help.
We have on our second panel the Honorable Charlene Barshefsky, the former U.S. Trade Representative who negotiated the November 1999 Bilateral Market Access Agreement with China that prepared the way for China's entry into the World Trade Organization which my understanding this could happen as late as later this year. I'm going to assume it's later this year. I think that would be the hope of the Chinese to get in before the next WTO meeting, general meeting, which could be in November.
In addition to Ambassador Barshefsky, we are very fortunate to have with us Admiral Joseph W. Prueher, who was our Ambassador to China from December 1999 to May of this year and he did a great job during that difficult period with the plane. Previously, the Admiral served as Commander and Chief of the U.S. Pacific Command, so he brings in expertise on China and on national security matters that we very much welcome. If I could first call on Ambassador Barshefsky.
AMBASSADOR BARSHEFSKY: Thank you very much. It's a great pleasure to be here and it's particularly a pleasure to be here with Joe Prueher, who did a brilliant job as our Ambassador, not only with respect to national security issues, but with respect to the issues with which I was most familiar and that is trade.
Let me begin by saying that as you know, in November of 1999 after years of negotiation, the U.S. and China reached a bilateral agreement on China's WTO accession. The agreement secures broad range and comprehensive one-way trade concessions on China's part, granting the U.S. substantially greater market access across the spectrum of industrial goods, services and agriculture. This agreement strengthens our guarantees of fair trade and it gives the U.S. far greater ability to enforce China’s trade commitments.
By contrast, the U.S. agreed only to maintain the market access policies we already apply to China and have for over 20 years, by making China's normal trade relations status permanent. China's WTO accession is a clear economic win for the United States. Together with permanent NTR, it will help to open the world's largest market to our goods, farm products and services in a way we have not seen in the modern era. But China's accession also has deeper implications. Our relationship with China, given her size and economic weight, affects all of America's foreign policy and security goals in Asia from broad strategic interests to regional issues in Korea, Southeast Asia and elsewhere; human rights and religious freedom; weapons proliferation, environmental issues; labor rights; crime; narcotics trafficking and many others.
We have serious differences with China on a number of these issues and we have found areas of common ground as well. We have a fundamental responsibility, I believe, to help develop a stable, mutually beneficial relationship in which we act upon areas of shared benefit and mutual interest while we also make clear our areas of disagreement and aggressively assert our rights and positions.
WTO accession will form a key foundation of our relationship with China and will help promote longstanding American goals in China. First, by helping to open and liberalize China's economy, accession will, over time, help to create new economic freedoms for Chinese citizens and promote the rule of law in many fields now dominated by state power and control. A number of leading Chinese and Hong Kong advocates of democracy have endorsed WTO membership not only for its economic value but as a foundation for broader future reform. And second, by integrating China more firmly into the Pacific and world economies, WTO accession will give China a greater stake in regional stability and prosperity. It will, thus, together with our military presence in the Asia Pacific and our regional alliances, be a factor in favor of long term regional peace.
Let me take a moment, if I could, and put China's accession in its historic context. The WTO that China now seeks to join had its roots in the GATT, the General Agreement on Tariffs and Trade. Its creation in 1948 reflected the personal experience of President Truman and his European counterparts in economic depression and war. They had seen the Smoot-Haley Act in America and similar protectionist policies overseas, deeper in the depression and contribute to the political upheavals of the 1930's.
Post-war, they believed that by reopening world markets, they could promote growth and raise living standards and that, in tandem with a strong and confident security policy as open markets gave nations greater stakes in peace and stability and prosperity beyond their borders, a fragile peace would strengthen. The work they began has continued for over 50 years and the faith they've placed in open markets and the rule of law has been abundantly vindicated.
Through eight rounds of global negotiations and as 112 new members joined the 23 founders of the GATT, we abandoned the closed markets of the depression era and helped to foster a 50-year economic boom. China was a founding member of the GATT, one of the original 23 countries, but with the Communist revolution in 1949, China embarked on a different course. Among its new leader's first steps were to expel foreign businesses from China and bar direct economic contact between Chinese citizens and the outside world.
Inside China were similar policies, including the destruction of private internal trading networks, abolition of private property, abolition of land ownership and of course, the suppression of the right to object to any of these policy changes. One cannot separate post-war China's deepening isolation from the outside world from its steadily increasing internal repression and diminishing space for individual life and freedom.
Likewise, China's economic isolation had severe consequences for regional peace and stability. Asia's largest nation had little stake and prosperity and stability -- indeed, saw advantage in warfare and revolution -- beyond its borders. Every Pacific nation felt the consequences not only in economics and trade but in peace and security. China's domestic reforms since 1978 have helped to undo this isolation integrating China into the Pacific regional economy as they opened opportunities for Chinese at home. The results have been profoundly positive.
As China's people regained the right to farm their own land, open businesses, choose their own places of employment, they have found new opportunities, both to raise living standards and determine their own futures. At the same time, China has moved gradually from a revolutionary role in the Asia Pacific region to a willingness to play a positive and stabilizing role on issues as varied as maintaining the peace on the Korean peninsula and the Asian financial crisis.
A bipartisan American trade policy over the past 30 years has contributed to these positive trends. Broadly speaking, U.S. goals have been to support Chinese domestic economic reform and integrate China into the Pacific regional economy through a variety of means including commercial trade agreements. This has extended from a lifting of the trade embargo in 1972 by President Nixon to our Bilateral Commercial Agreement in 1980 under President Jimmy Carter, to agreements in the 80's and to a series of agreements in the Clinton years on intellectual property rights protection, textiles and agriculture.
Taken as a whole, this work has helped to open the Chinese economy, created a new series of opportunities for Americans, and given the Chinese public a broader array of contacts with the outside world than at any time since the late 1940's. But this work is only partly done. China's trade barriers remain very high. A number of policies dating from the 1950's are still unchanged and China's integration with the world economy remains insecure. Like Japan, China's neighbors remain blocked from an economy which could be an engine of growth for the region.
WTO accession represents a potentially profound and historic opportunity building upon but going much farther than China's domestic reforms to date. As it joins the WTO, China will do much more than simply reduce trade barriers at the border. In much broader terms, for the first time since the 1940's China will permit foreigners and Chinese businesses to import and export freely into and out of China. China will reduce and in some cases remove entirely state control over internal distribution of goods and the provision of services. For the first time since the 1940s, China will enable foreign businesses to participate in information industries such as telecom, including the Internet. And China will subject its decisions in all areas covered by the WTO to enforcement, including informal dispute settlement and trade sanctions, if necessary.
These commitments are a remarkable victory for economic reformers in China: moving China away from a number of policies dating from the Cultural Revolution and Great Leap Forward. Its WTO accession will go further, helping to reform policies dating to the earliest years of the Communist era, including absolute government control over economic contacts with foreigners, nationalization of major industries and destruction of private local commerce within China.
All together this will, over time, give China's people more access to information. It will help to weaken the ability of hardliners in China to isolate China's public from outside influences and ideas. More deeply, WTO accession reflects a judgment, though one not universally shared among China's leadership, that prosperity, security and international respect will not come from the static nationalism, state power and state control over the economy that China adopted after the war. Rather, China is more likely to gain these from greater integration with the world, rising economic freedom at home and ultimately, development of a rule of law. These are concepts inherent in the initiative President Truman began in 1948 with the founding of the GATT.
Accession, because it has a potential beyond economics toward the development of the rule of law, is supported by many Hong Kong and Chinese activists for democracy and human rights. Whether Martin Lee, the leader of Hong Kong's democratic party, or Ren Wanding, the founder of China's modern human rights movement -- all have viewed WTO accession as China's most important step toward internal reform in 20 years It is why the Clinton Administration's support for China, and why I believe the Bush Administration's support for China's WTO accession, rests on a broader, long-term commitment to human rights and freedoms as well as new opportunities and strengthened guarantees of fairness for Americans.
And with that, I'll be pleased to stop.
CO-CHAIRMAN MULLOY: Thank you, Ambassador Barshefsky.
Admiral Prueher?

ADMIRAL PRUEHER: Thanks a lot, Commissioner Mulloy. For the members of the Commission, it's a pleasure for me to be here today and to be with you. I beg your indulgence in that I have not submitted a written statement. My household goods are not yet unpacked and I don't have a typewriter, so I will buff up my transcript a little bit to give you a written statement.
Also, it's a pleasure for me to be here with Ambassador Barshefsky. We are accustomed to seeing each other when we are weary, so this is a treat. I also would like to give one demurral. I am not an old China hand. There are some here whose works I read, who understand China better. Art Waldron is not here today, but he also does a great job with that, but I have been heavily immersed for the last five years in China issues with both some skinned knuckles to show for it, as well as a deep respect for a lot of the things the Chinese are doing.
One of the things that is evident from listening to the speakers today and also from listening to the questions is the difficulty of trying to get a balanced discussion about China. Ambassador Lilley cautions against anecdotes. One of the points that many make that know anything about China is that you can find numerous examples of things that are wonderful about China and you can find an equally number of outrageous things to typify the things that we don't like about China. It's important to get those in balance; the Commission has a big challenge to do just that.
Let me start by trying to get what I think is the right perspective about China. First - and these are points that I've heard made before - but I'd like to summarize them. The U.S./China relationship is very important to us. It's important to the East Asia Pacific Region and it's important to global security (I'll talk about the security issue a little bit more later). One of the most enlightening examples straying into the anecdotal realm, was shortly after I got to China a young doctoral candidate came up to me in the airport while we were waiting for the airplane and said, "I've been studying Manifest Destiny in the United States I wondered if you'd like to discuss that with respect to our version of the Middle Kingdom". It's a very interesting discussion to have and you can go on and on with it, but what it means is the people of the United States feel correctly that our country is special in the world and we have a special influence in the world.
The Chinese feel the same way. It brings us into confrontation a lot of times because we both believe we have some things right. However, it shapes a little bit of our national outlook and it shapes our view toward each other and it shapes the competition that we have over many issues. Another thing that has occurred in the last few years of working with the Congress, working with groups in the United States, is that I think a lot of Americans, (not necessarily ones that are really into the topic, but many) tend to equate monolithic world Communism and the views represented by Khruschev’s "We will bury you", with Chinese Communism and think that they are somewhat one and the same.
My own opinion is that this view misses the mark. Chinese characteristics transcend the Communist characteristics. Many of the things we like about China are Chinese, not Communist; and many of the things we don't like are also Chinese, not Communist. So there's a hazard in getting too much of the Communist ideology in this discussion. Though it has some merit, I didn't meet very many Communist ideologues in China in the last few years. There are some, but there are not too many around. Let's be careful of not overdoing that bias.
Another point that has been made a couple of times is we need to think in two ways. We need to think in the long haul, strategically about our relationship with China. How do we want all this to turn out in the end game? We need to think in those terms. The other part - some people dwell on the economic and trade part - is the shorter haul, the tactical haul, how do we want to get there. And those are two sort of separate topics. But we need to not lose sight of what we want the picture to look like at the end of 25 or 30 years and then how do we get to that level.
Another point that I think is very important as we look at U.S. foreign policy, our U.S. foreign policy; toward China is driven by our domestic policy. Our articulations are done that way, out thoughts about it are done that way and our foreign policy and our economic policy toward China is sub-optimized to our domestic policy and our domestic audience. That's as it should be.
Likewise, when we look at what China says about the United States, the same thing is true there. They are speaking to domestic constituencies in China. Their articulations, some of the utterances that you see out of the leadership is meant not for us. It's meant for the Chinese domestic constituency as they try to maintain stability in China and trying to change. That's an important facet to understand and an important part to think about.
I mentioned the good and the bad. When one goes to China and spends some time, you're captured by the people, the ordinary Chinese. The point that was brought up earlier was the sense of entrepreneurship, certainly a prominent point. Also there's a sense of irreverence for authority. There's a sense of humor amongst the Chinese, the ordinary Chinese. There's a sense of dignity. You also, when you talk to some of the leadership, get a large sense of real purpose that they are trying to solve Chinese problems. They'll solve them at someone else's expense, if they can, but they're really trying to solve Chinese problems and not just trying to be counter anything that the United States might like.
You're also captured, of course, with the things you can admire, the work ethic, which goes into cheap labor, but also there's a tremendous work ethic, an intellectual capacity and the dignity that I mentioned as well as the sense of culture. I think it's important to be wary of being too cynical about the motives of the Chinese. However, a heavy dose of non-naivety and skepticism is very much warranted. In the negotiating piece of our interaction (or how they are dealing in the tactical part) it's hardball all the way, but when you look at their motives, you need to think a little bit and understand their point of view.
Now, on the other hand, there are things that are just anathema to us and they've been brought up today; human rights issues, religion freedom issues, lack of rule of law. I think if our Chinese compatriots could get along fine and organize and structure their modernization without rule of law, they'd probably be happy to do so. But I think they see they need this structure to move ahead and modernize and improve their economy. Let me shift now to what I think the U.S. interests are and what we are trying to do.
Many people say (I'm one of them) that the common interest that China has with the United States outweigh our differences. That's a nice statement to make. It's a good platitude. Okay, and then you've got to get into it, what are some of those things? The U.S. objectives in East Asia are a stable, not rigid status quo, but stable, a secure East Asia Pacific Region in which the people of the neighborhood, us included, can pursue prosperity in a peaceful way.
China has that same objective. Those are our long term objectives. Now, subsets of this are regional stability in the military sense that we talked about Ö traditional security thoughts. Jamu and Kashmir is an issue for us. The Korean Peninsula is an issue for us and it's looking better, not finished but better. And then the other one is, of course, the Taiwan Straits where there exists both a conflict for us and also a common interest. If a stable situation, suitable to both sides of the straits can be achieved, that would be in the U.S. interest as well.
We can talk more about Taiwan in the Q and A if you'd like to. I don't want to derail now because that's a separate subject. There are other issues we have in common which are transnational issues. Terrorism, China is not an exporter. Environmental issues, non-proliferation issues, water, AIDS, food, those things are things that our nations need to work well on together in order to have them come out right for the globe.
World organizational issues, the foremost one today, of course, is the WTO, but also UN, the World Health Organization, World Food Organization, all of those others and then finally we have a common interest in economics and trade. As was pointed out, I think, by all others, either pro or con on leverage for WTO, we're going to trade with China. It's going on now. It's going to go on in the future. One of the dilemmas on WTO entry is most nations that enter are just entering onto the world trade scene in a big way. China's been on it for a long time. So they are both developed and undeveloped.
There is a particular dilemma, but it behooves both of our nations to get a standard set of ground rules with which we can work. WTO accession offers that. I, again, tip my hat to Charlene. She's a tough negotiator and she drove a very good bargain for the United States in getting a negotiation and in getting an agreement for WTO. It may be so good that the Chinese have a hard time complying with it. That's true.
I'd also like to tip my hat to Bob Zoellick on his recent trip to Shanghai. They worked some of the really tough issues from a little different perspective. Now, it looks like we have a situation where we can move forward. And this leads to implementation of PNTR and WTO and the question: Will it work? I think that's one of your fundamental issues. Will it work over time? The fact is, it will and soon China can comply with many parts of WTO - several issues and a lot of the stipulations of the WTO agreement. Other stipulations will need phase-in which come in various levels. My opinion is some compliance will take longer than are in the agreement. It's going to be very difficult.
And analogue for me (I'm a simpleminded sailor here). Say you've got a teenager that you want to teach to bench press or train to bench press 400 pounds. You can't just say, "Bench press 400 pounds, start doing it. I'm going to monitor you every day and beat you if you don't". You know, there has to be a balance of training. There has to be some time to comply and be able to do it and there has to be some help in coaching. So I think this is important to the Levin-Bereuter addition. I didn't hear Senator Thompson's testimony this morning but we've had quite a few discussions over the last couple years and I know and agree with his point of view on non-proliferation.
So another issue is let's not give up leverage on these important issues. That's a very good point, but we need to balance our monitoring and compliance efforts with coordinating with the EU and Japan with training and education efforts in order to hasten the compliance of China into WTO. This will be important: education, training combined with monitoring compliance thoroughly.
The objective is that U.S. firms don't necessarily get an advantage, but they get a fair chance to compete in China, a fair chance to compete not only with Chinese, but also with the EU and also with the Japanese there, who are tough competitors indeed.
Finally, I'd like to get at the issue of security that we talked about earlier because it's very important to me and important to all of us. Security is traditionally talked about in military terms, but that is not quite sufficient for what we're encountering in the world today. In my mind and with many others that ponder this subject, security really encompasses three elements; political, traditional military security, and economic (or economic and trade). I think of these as three overlapping Venn diagrams and at one point or another in various relationships one Venn diagram will be pre-eminent but you're working in the middle where those Venn diagrams overlap. You cannot ignore the economic or the political things when you're working the physical military security part nor can you ignore the military part when you're trying to work politics or when you're trying to work the economics.
Now, if you think about security in that whole context, vis-a-vis our relationship with China, and we need to watch each htmect very carefully. PNTR or WTO accession is not an end in itself for China. It's part of a continuum of the security issue and it's something -- but it's an essential part as we move forward in our relationship. And this relationship as we work with China, is something that is doable. But it is not easy and it's not something that the Commission is going to be able to solve by recommending a single bold stroke -- the way we would like to do it.
If it grows, and it can, this relationship will be something that grow over time. Time and patience are not two of our foremost virtues. It's going to need comprehensive dialogue at the highest levels to work at this inner section of the Venn’s. It needs to be worked again comprehensively in the military, political and economic piece. We cannot work them independently.
My real last point is that China is in a stage of immense transition right now. They are also faced with immense challenges. Now, you read some articles where authors talk about how strong China is getting: we must fear it. We are told to feel that China is on the ascendancy. There's no doubt about that. We cannot control, as someone pointed out before, how this occurs but we can really skew how this change occurs in China.
We must remember China has huge challenges as well; the non-performing loans in their banks and the conversion of their state owned enterprises are two tremendous challenges for them. The split between what we read about of the ascending China, which is only 300 million, and the other 900 or billion Chinese in the agriculture sector who are not enjoying all these advantages. We have this dichotomy where a discussion comes up regarding influence of the Internet and you go to Shanghai or Beijing and you go to Internet Cafe and you think the Internet will have a big influence. You can go 60 miles from there and go to a town where there's not electricity or running water. Internet has zero impact in that town and on that sector of the Chinese which is the majority of the population.
The central dilemma in China right now is a Communist leadership which is based on control of the politics, whose legitimacy depends on delivering the economic goods to the people of China, in competition with an opening, modernizing economy. They have to be opening up in order to play in the global economy. And so these things are in competition right now and the leadership is trying to figure out how to come to grips with this.
This closed grip is coupled with the succession issue that is going on in China. We should know in August and September, a little more how that's going to play. Then in 2002 there will be a leadership change in China. So we can expect this and the WTO accession will create more churn in the system in China. It is difficult for their leaders to grapple with this conflict they're trying to figure out how to do it Ö but they know they have to. And it's in our long term interest, I think, that China have a stable and the least turbulent transition possible to a modernizing economy and that we should avoid unnecessary -- and I want to emphasize unnecessary, confrontation with China on small issues.
There are plenty of issues. I'm not really very starry eyed about China these days, but there are some things where we need to confront them directly and openly and at a high level, but there are others where we need not confront them on every single topic. The best outcome in my view that could come out of the committee will be a setup for productive communications with China that open the gates where we can have dialogue back and forth, dialogue that has some teeth in it.
The other thing that I think it important to know is that the big drivers in China are the government, the party and the Central Military Committee. The agent -- most of the things that we deal with are with the government because that's what we traditionally deal with. The agent of change in China, however, is that party. It's not the government. And so we have an antipathy for dealing -- consorting with the Communists, you know, dealing with the party, but I can tell you quite frankly, if you want to influence change, the working and having a dialogue with the party apparatus in China is very important.
It is interesting that one of the leaders, Hu Jintao -- perhaps to be Jiang Zemin's successor, is the head of the Communist Party school. That's his base there. So it's something that, maybe we don't like dealing with the Communists, but that's where you're going to have to push and pull in order to influence this change in the way that we want to. Thank you very much.

CO-CHAIRMAN MULLOY: Thank you, Admiral. Now, Ambassador and Admiral, here's the way we're going to go. We're going to go back and forth between the Commissioners appointed by the Republicans and the Democrats but since we have a limited time, we're going to have the lights go on. Each Commissioner is going to get six minutes and then when that red light goes on, try and finish up your answer so that the next person can have their chance. And the first Commissioner who has asked for time to ask questions of this panel is Commissioner Reinsch.
COMMISSIONER REINSCH: Thanks, Pat. I just have a couple of questions that are on the implementation topic. And feel free to respond within the parameters of your experience, but I'm not confining the question just to the WTO agreement. One of the Senators, who will remain nameless, alluded earlier to the frequency with which the Chinese have violated their agreements. And my experience, which is less extensive than yours, is that they've been scrupulous in adhering to the letter of their agreements, are adept in creating and then exploiting loopholes in them at the same time, which is a challenge for our negotiators to try to prevent.
What has been your experience? Do you find that generally they honor the agreements that they make or is this an ongoing problem?
AMBASSADOR BARSHEFSKY: Certainly compliance with agreements presents challenges but on the whole China's compliance is no less rigorous than most of our other large trading partners such as Europe, Australia, New Zealand, Brazil, Japan. There is a tendency among all of these countries, and by the United States, to skirt around a bit if one feels politically one has to. And China is certainly no exception.
What we have found is that China's degree of compliance increases by the extent to which the obligations are very precise and in the nature of quantifiable. So for example, China's compliance with tariff changes has always been excellent because that's a known, concrete obligation and compliance can be objectively judged. When we negotiated the WTO accession agreement, it was with that example in mind, leading to an agreement, which as you know, doesn't read like an agreement. It reads more like a 150 pages of grid. We did this that China in every year, at every point, knows exactly what the obligation is and we know exactly what our rights are.
COMMISSIONER REINSCH: Admiral, is your experience the same?
ADMIRAL PRUEHER: I can add just a little bit that, yes, the experience is the same. When one gets back to the Chinese approach it is not a rule of law approach -- so if there are a rigid set of agreements, they will look for ways around it like some others do. The other experience that I've had, even with where we had very contentious issues, if there was good agreement on the objective, what you're trying to achieve and then a meeting of the minds, you could proceed toward the objective without very much framework.
And there are examples of businesses who have had large contracts on a handshake who have been very happy with the relationship, made a profit, done all right. Then there are others that have had very complex negotiations and everything written down and just a hopeless quagmire of trying to get ahead because everyone, they're looking for loopholes without spending the time on the objectives in advance.
COMMISSIONER REINSCH: I'm glad you brought up the rule of law question. To what extent do you think that especially with the WTO agreement we're in a situation where the will to implement may be there but the institutional mechanisms are either non-existent or too weak to permit implementation?
AMBASSADOR BARSHEFSKY: Certainly, institutionally China is going to have to build the kind of mechanisms we would expect to see in order to insure compliance. I think there's no question that in some areas those mechanisms do not exist; for example, in services trade or telecom, areas that for China are relatively new. I think U.S., European and Japanese technical and expert assistance will be necessary. The WTO itself will also have to provide technical assistance. This coupled with the kinds of transition periods that we negotiated, should help to ensure that implementation will proceed on a rational basis.
In addition, as you know, China is the only country that will be subject to an independent monitoring mechanism in the WTO itself -- a multi-lateral monitoring mechanism. The theory behind this is that to the extent problems can be uncovered early, one has a much greater chance of full implementation down the road.
COMMISSIONER REINSCH: Thank you.
ADMIRAL PRUEHER: The only part that I would add to that is [I agree with your basic point -- that there is a will at high levels to comply.] That there are three levels at the central level, the provincial level and the local level where compliance will be required and it's not well-regimented. Zhu Rhongji brings out the statistic usually that to run their legal system as it's currently set up, needs 180,000 judges. They have nine percent that have any legal training at all and a lot of them, no offense, but they're retired Army sergeants and stuff like that. And so --
COMMISSIONER REINSCH: There's an opportunity for a joke here but I think I'll --
ADMIRAL PRUEHER: Well, no, but implementation will be tough and it will take some time.
COMMISSIONER REINSCH: Final question, if I may, primarily for Ambassador Barshefsky, but feel free to comment, Admiral, I was struck in your testimony by a topic close to my heart which is the agreement you got on tech transfer, and their commitment not to require it. How realistic is that, and looking back, what has our experience been so far with at least the spirit of that recognizing, you know, they're not fully into WTO yet?
AMBASSADOR BARSHEFSKY: I don't think we have any practical experience with that yet because they're not in the WTO and it is difficult to argue that they have to change commitments in current contracts on tech transfer in advance of WTO accession. I do think that this is a very, very important commitment and I think the United States is going to have to be vigilant with respect to it, as well as with respect to the entire agreement vis-à-vis implementation.
Tech transfer, as you know, is a continuing problem. It's not just a Chinese problem. We have tech transfer requirements in many developed countries as well and that is of great concern. The principal source of information on tech transfer requirements will be businesses, who are subject to those requirements, either de facto or de jure. And certainly the U.S. Government is itself going to have to insure that it has a range of information available to it through embassies, commercial counselors and so on, so that that obligation can be fully enforced.
CO-CHAIRMAN MULLOY: If I could now turn to Ambassador Lilley.
CO-CHAIRMAN LILLEY: Yes. Charlene, I was very interested in your comment on the sixth page of your testimony to the effect that, "Weaken the ability of hardliners in government to isolate China's public from outside influences and ideas". Hardliners in China, it's used all the time that there's resistance inside China to the WTO and

to a hell of a lot of other things. And after the April 1999 period when Zhu Rhongji went back to China he was absolutely savaged by people in the system.
And Joe Fewsmith wrote a piece on this, an interesting piece, analyzing forces in China. And I hear that even in the delegation in Shanghai with Zoellick and company there was some dissention in the Chinese delegation. The comment was also made that domestic considerations can drive foreign policy. One of the lessons that I suppose the old China hands wallow in is in China there are things going on that are going to drive their foreign policy that are totally domestic. Recently we've gotten these reports of the party document, the dissent and violence and demonstrations in China that's gone on from 60,000 to 100,000 a year. There seems to be real dissent in China. We've talked about disparities, rural, urban, this sort of thing, and what I'm concerned about, who are these hardliners?
I mean, of course, we have a sense of who they are but you just look at the picture of May 19, 1989 of Zhao Ziyaug going down to the bus in Tiananman Square, and he's with Wen Jiabao and who's standing over there behind him is Li Peng with Luo Gan next to him. There's a very sort of pictorial dramatization of these two lines in China but I think it's very important that we try to figure out who these so-called hard-line leaders are, what their power base is, how they are dealing with these people that we consider to be more anxious for China to join the international community.
There's kind of a caricature of the hardliner which you get from anybody that doesn't think it through very carefully I would insist that you've got to get this one right and you've got know who these people are, what their agenda is, how much power they have, how they're going to go after the United States relationship, how they're going to try to isolate the U.S. I open it up to you. I'd like your view on what is this creature; is it a creation of the American imagination? I don't think so. There's something there.
AMBASSADOR BARSHEFSKY: Joe is probably better equipped to answer this but let me take a stab --
ADMIRAL PRUEHER: And I'm ill equipped.
AMBASSADOR BARSHEFSKY: Let me just take a stab on one very narrow area, which is not a “who” answer but a “what” answer. The single hardest area to negotiate with China was telecom. Why is that? Because telecom is access to information. The Internet and telecom presents to the Chinese public something actually quite radical. That is to say, substantial information outside the bounds of the Communist Party. This was by far and away the most difficult area of negotiation.
I could probably throw out names as to the “who's” are but I think that's actually --
CO-CHAIRMAN LILLEY: I think we know who the guy is.
AMBASSADOR BARSHEFSKY: -- less relevant. The point here is that information is a commodity of concern among some in the Chinese leadership. Add to this general concern the fact that “information” to the Chinese leadership also encompasses what we think of as “entertainment”. Movies, for example, are not entertainment to many in the Chinese leadership. They are sources of information.
So this fear of information and the broad dissemination of information led to a negotiation on telecom that was very difficult. It would have been the deal breaker for the U.S., but ultimately China moved on the issue. “Information” is one example of a what is feared in China, putting aside the specifics of “who” fears it.
ADMIRAL PRUEHER: Commissioner Lilley, I'm not sure exactly where your question was because the statement is certainly correct and I think the essence is to try to figure out who makes the decisions and how they are made. How those factions play is something to which I quite frankly do not know the complete answer. I know some of it, I think or have a feel for some of it, but I don't think we understand it and I think your point in trying to understand that as we move forward over this range of issues, WTO aside. The security and the political issues as well, are critical and I think it's something we need to follow to understand how the small advisory groups and the party work and who has that range.
CO-CHAIRMAN LILLEY: Well, you know, if you go back in history, you go back to let's say the 1976 period, where it was easy to cartoonize the bad guys, the gang of four.
ADMIRAL PRUEHER: Right.
CO-CHAIRMAN LILLEY: The radicals, Mao's wife, this sort of thing against the better guys, Deng Xiaoping and the reversal of verdicts in 1977-1978
ADMIRAL PRUEHER: Right.
CO-CHAIRMAN LILLEY: -- that was out on the table, we talked about it. We argued about it and we took a position, we backed a faction in China, namely Deng and he prevailed and that made a big difference in Chinese American policy. Is there any relevance to what we're trying to do today? Is there any area where you could engage in this?
AMBASSADOR BARSHEFSKY: Well, let me repeat something that former President Clinton said, which I think is very true. We can't dictate to China what China will do, how it will develop, how it will modernize, how its political system will or won't change. All we can do is try and create the conditions under which change may be possible to create options that didn't exist before that might be effective in bringing about change in China in a positive direction. That's probably about the best we can do.
The notion that we can dictate to China the way in which it ought to change is, I think, a foolish notion, disproved by our attempts to dictate on occasion to other countries that they should change, countries much, much smaller and which we've had relatively little effect. I think what we can do however is to help create the conditions in which change can occur. WTO accession is one such opportunity. It doesn't mean China will make the right choices down the road, but I think we have an obligation to provide it with ample options and ample opportunity, and I think we've done that.
CO-CHAIRMAN MULLOY: Admiral, if you want to make a quick comment and then we'll move on.
ADMIRAL PRUEHER: One quick one here. The example you brought up of Zhu coming in April of '99, where I think most would agree at this point that we set back a bit what we were trying to do. We made his position much more difficult in China. We can avoid making large mistakes, I think. But, again, our own domestic situation will drive that. Then second, in my view, is the best we'd ever get is to get it roughly right and not absolutely wrong as we move forward because I don't think we're going – to know exactly how to nuance every little piece of this.
CO-CHAIRMAN LILLEY: Since we're quoting Clinton, I think he made one of the more poignant statements I've heard when we went down to the White House and he got us all down there, the people that supported PNTR. And all the other speeches were rather dull, but he gets up and he hits it right on the head. I'm sorry, Mr. Trumka is not here, but Clinton says, "Those who are against PNTR in the United States", he didn't specify whom, "are linking themselves with the most reactionary hard-line elements in China who are also against WTO", and I asked him afterwards, "That was a terrific statement you made".
Well, Sandy Berger wrote it up in the Wall Street Journal, but I asked Ken Leiberthal (phonetic) whether Ken had written that for him. He said, "Hell, no, he winged it. It was his idea".
AMBASSADOR BARSHEFSKY: Exactly right.
CO-CHAIRMAN LILLEY: And anyway, I'm sorry.
CO-CHAIRMAN MULLOY: Thank you. Commissioner Wessel?
COMMISSIONER WESSEL: Well, rather than responding to questions from other commissioners, I'll ask some myself because there certainly are some debates that could go on about President Clinton's statements. We've seen this morning a tremendous amount of questioning and concern about China's ability to comply with the accession agreement, understanding that it appears to be inevitable, number one, and number two developing the infrastructure -judicial and otherwise - for them to do so is going to take time and effort.
Yet, later this year we're expecting another ministerial meeting to potentially begin a new round of trade negotiations at the WTO which will bring with it potentially new commitments and we're not even sure that China has the infrastructure or the ability to meet the current commitments. I'd like your views, number one, on the advisability of doing that, number two, as well as the question since it's hot in the news, of whether, in fact, we need fast track to do that, and if so, do we need the fast track that was announced by the Republican leadership yesterday? Is that the right approach? That's a softball.
AMBASSADOR BARSHEFSKY: I don't think the question of a new Round ought to be in any way linked to China's forthcoming accession to the WTO. I think these are independent events. There is ample reason to think that a new Round would be a good thing -- if not this year, next yea. But I think that it is an event independent from China's accession. To be sure, China as a player in any new Round, will be the recipient of requests for further market opening. There are any one of a number of areas one could posit. On the other hand, I think it is fair to say that China has bitten off quite a bit, and countries would be well advised not to over-promise to their publics substantial additional market opening at any time soon by China beyond this accession agreement.
With respect to fast track, I think my views are very well known. I think fast track is desirable but not necessary, as evidenced in part by the China vote in the House of Representatives. And I'll ask simply one question of you, that is, if the Clinton Administration had wanted fast track to do the China deal, would it have gotten it? Answer, no, never in a million years. But the China deal passed by a 40 vote margin in the House. So I think just talk is a desirable tool, in the sense, for example, that foreign countries are used to it. It also provides some disciple with respect to Congressional debate and so on. But is it absolutely necessary? No.
COMMISSIONER WESSEL: I'll leave the last part of the question. We'll move beyond that. My understanding in the last several days is that there has been a question of whether China has sold weapons to Cuba or transferred weapons to Cuba, Admiral. And I guess there's a law, 1996 law, that precludes transfer of weapons, lethal weapons, to terrorist states or states that participate in terrorism. If the allegations are true, what actions do you think we should be taking? Is this, after we've seen the fiber optics earlier this year, which may not be a lethal weapon, but was enhancing the deliverability or the infrastructure, should we be taking action under that law?
ADMIRAL PRUEHER: Well, I have not been following the details of this. If, in fact, there is a transfer than we should take come sanction able action but my understanding of it is such that I don't know the magnitude of the issue.
And so this issue with Cuba, I'd have to get into the details of it and then get back to you with an opinion on it because I really don't know enough to answer it.
COMMISSIONER WESSEL: Okay, no further questions.
CO-CHAIRMAN MULLOY: Thank you. Commissioner Robinson.
COMMISSIONER ROBINSON: Yes, Ambassador Barshefsky, you touched on the Internet earlier and the fear of information flows and I strongly take your point on that. I was wondering if you could in the short time allowed, list some of the constraints, the key constraints that exist on unfettered access by the Chinese people to the Internet today and similarly, access of U.S. and foreign firms to engaging in unbridled Internet commerce because it is such an important area? What do you see as the largest obstacles right now?
AMBASSADOR BARSHEFSKY: I don't think I want to get too detailed because there are many, many rules and regulations here and as you know, the Chinese Government has had a penchant for changing them from time to time. But certainly problems that we ran into when I was at USTR included for example, requirements for licensing for Internet service providers with licenses not forthcoming. Requirements that the underlying technology used by the Internet service provider be given to the Chinese Government for review, including underlying codes. Requirements that certain types of information not be provided on the Internet, or if provided, the notion that the service provider would be held liable and potentially subject to criminal sanction if so-called “state security” was compromised.
On the other hand, we have seen Internet usage in China proliferate. The numbers are still small certainly, relative to the size of the population, but two years ago you were looking at probably 9 million users and now you're looking somewhere around 30 million users. It's a huge change in two years and as the technology becomes more diffuse, as foreign enterprises are allowed to invest more freely in China in the provision of Internet services, I think we'll see those numbers rise even faster. We will also see the Chinese Government faced with a relative inability to control content because at some point the technology ill simply the leadership. As Internet usage proliferates, controls on content in any foolproof systematic way, are going to be very, very difficult to impose.
COMMISSIONER ROBINSON: Well, we want to definitely keep up with you on that because I think that --
AMBASSADOR BARSHEFSKY: It's a fascinating area.
COMMISSIONER ROBINSON: -- my fellow Commissioners are seized with --
AMBASSADOR BARSHEFSKY: It's a fascinating -- if I might relate one antidote, not China related but Vietnam related. I was with former President Clinton in Vietnam. We had negotiated a large bilateral agreement with Vietnam -- the legislation is now up on Capitol Hill for normalizing trade relations with Vietnam. I did a lecture in Vietnam at a prestigious institution and a fellow, youngish fellow, raised his hand and asked a series of very sophisticated questions. It really took me aback because this was someone not of an academic background but a “worker” background.
I commented before answering, "How do you come to know the information that underlies your questions", to which he said, "Oh, the Internet", and I thought that was all I needed to know.
COMMISSIONER ROBINSON: Ambassador Prueher, do you believe that Russian military and -- military -- I mean, weapon, I should say and military technology transfers to China are genuinely worrisome to our security interest or do you think that they've been somewhat exaggerated by observers say in the non-governmental national security community, the think tanks around town and elsewhere?
ADMIRAL PRUEHER: It's a good question and one that doesn't have a definitive answer but my opinion is, is that the Russian technology transfers like SU-30's and some of the missiles, some of the submarines are of interest, the Sovremenny cruisers are of interest. We need to keep an eye on it because it can grow, and even perhaps grow to a level where it is problematic. Right now the numbers are quite small.
The SU-30's for example, are in the range of 200. The Echo class submarines are six, the Sovremenny's are two with perhaps going up to four. The numbers aren't too big but they perhaps are the start of a trend, but we don't know that. The other htmect is the -- what I think is sort of a sophist’s view of looking at military readiness is to count equipment, when really one needs to look at numbers of items, plus training, plus support, plus tactics, plus ability to use those things. Those don't come with that equipment.
The Chinese are quite good in their submarine world. They're quite good in their infantry world. They're quite good in their artillery world and rocketry, but with respect to Russian commodities, they don't fly and steam a lot. People who have bought Russian equipment are not generally pleased with it over the long haul. So the net answer to all that is that it doesn't bother me a lot but it's something we need to watch very carefully for the trend.
COMMISSIONER ROBINSON: Thank you.
CO-CHAIRMAN MULLOY: Thank you. Commissioner D'Amato, Chairman D'Amato.
CHAIRMAN D'AMATO: Thank you, Mr. Chairman. Madam Ambassador, I remember meeting with you one time in my office after you got back from I guess the first intellectual property negotiation. Little did you know you had to do that several times. My question has to do with compliance and monitoring on trade agreements and the question of whether or not we need to be tougher in a sense in making compliance and performance of previous agreements upon future agreements and negotiations.
You know, we met with the Customs folks who say that their compliance with this Customs agreement we have with China is dismal. Do we have enough tools in our toolbox to insure compliance with this country? Some people say to this Commission, "Well, you've got to figure out other tools for our toolbox here". That maybe we need to have -- how do you grade them on compliance and is there -- having thought about your experience, are there things that you would do to try and improve that, make our ability to get compliance more effective?
AMBASSADOR BARSHEFSKY: Compliance was always in our thinking when we negotiated the agreement. And there are more compliance-related mechanisms in China's WTO agreement than in any other WTO agreement for any country. Apart from WTO dispute settlement which, by and large, has been quite effective (European agricultural policy aside) we, as you know, retained the right for many years to come to use our special non-market economy anti-dumping methodology as well as special anti-surge protection in the U.S.
Those are defensive weapons, but they can also be used as offensive weapons. Many times disaffected industries that can't get access abroad bring protective actions at home to force market opening abroad, and these two tools are certainly available in that offensive spirit, in addition to their defensive htmect. There will also be, as I said, a multilateral review of China's compliance with its obligations. That is, I think, going to be a very important catalyst for Chinese implementation, as well as an early warning system for countries concerned about implementation.
And in addition, of course, there will be much greater U.S. resources devoted to Chinese compliance, to monitoring and implementation. President Clinton came forward with a large budget request on this which was granted. I suspect President Bush, over the course of his term, will supplement those funds. That will also be very, very important.
CHAIRMAN D'AMATO: So you do think additional monitoring resources, we should be looking at that.
AMBASSADOR BARSHEFSKY: I think it's worth looking at. I would first assess what we have, which may be adequate for right now. But a couple years down the road, that level of funding may not be adequate any longer.
CHAIRMAN D'AMATO: May I make a -- yes, go ahead.
ADMIRAL PRUEHER: In talking to Secretary of Commerce Evans about this, the monitoring and compliance part was important; the foreign commercial service part of this is important. From speaking as a field hand embassy point of view, I think a lot of the effort needs to be on site in China, not just here in Washington. So that balance needs to be beefed up here and also be on site.
CHAIRMAN D'AMATO: Thank you. I have another question. We make the assumption, two assumptions that you talk about a tremendous change going on in China, and secondly, no matter how you measure it, the Chinese are very dependent on the American economic connections here. Clearly the dependency on our economy is greater than any other economy by orders of magnitude. The question is whether we really are exercising our influence effectively given those two assumptions.
I mean, there are people who have made the presentation that it's impossible to stand up for our values, vis-a-vis, the Chinese. They just won't go along with this, so forget about it as to the economic pressure. Forget about human rights, forget about these kinds of things. It's kind of intuitive to me to link and say all those things together, that these beg assumptions of (1) dependency and (2) beg the question: of volatility, how flexible is the Chinese regime to the kind of influence that we could bring to bear -- not necessarily with a sledge hammer but with sophisticated tools of persuasion? To what extent are we really being effective in influencing the Chinese regime along the standards that we think are proper for a civilized government?
ADMIRAL PRUEHER: Let me get at this in the human rights area a little bit. We have gone for quite a few years in the human rights arena where the United States has -- with respect to some other nations, has led the way on human rights issues with Geneva, with confrontation over particular issues with the Chinese on particular events, but in my view, the confrontation has become -- had become so critical that it was not achieving systemic change. It was -- we'd get a fillip every now and then -- get a release of an important person that we cared about at a time when an important visit was coming up, but it was not engendering systemic change in the system.
The EU countries were not confronting at Geneva. They weren't necessarily confronting except on rare occasions in China. They were having dialogue. They were criticized by the human rights communities for just having dialogue in lieu of progress. I think some combination of the two is required and that's where we are right now. The Chinese have agreed to recommence a human rights dialogue in spite of the Geneva resolution of this past year.
So I think we need to move along, confronting because this is a core issue for the United States. It's a seminal value -- the Declaration of Independence, the Constitution -- it is a core value for the United States. We cannot abandon it. And so, we need to go forward and continue to confront but realize that the Chinese don't start with our premise but we need to work away at it.
I don't think that can be the only issue. And so I think the discussion, the dialogue, as well as the confrontation need to occur together. Then we need to get labor issues into our contracts and into our negotiations (and we're talking about doing it) to gradually effect change. Change will not, cannot be instantaneous. Systems don't change in a step input, they change gradually but it will not change at all if we don't push.
AMBASSADOR BARSHEFSKY: Well, the only thing I would say is that we know, in terms of modern China -- our version of “modern”, not their version of “modern” -- that the most repressive periods in China have been in times of isolation, that is, when China has been most isolated from the world. The Cultural Revolution is the perfect example. The level of repression was simply breathtaking and country-wide. I think it's very important that when we disagree with China, or when we have fundamental concerns, those be asserted very aggressively, unapologetically and with the full force that our arguments can muster. But I agree with Joe that change when change occurs, is slow. It is not cataclysmic, and we need to be prepared for that slower pace of change.
But should we hope for change? Yes. Should we do everything we can to push? Absolutely, absolutely.
CHAIRMAN D'AMATO: Persistence then in the long run?
AMBASSADOR BARSHEFSKY: There is no substitute for persistence. That is ultimately the key to successful negotiation. There is simply no substitute for persistence.
CO-CHAIRMAN MULLOY: And I'm going to be persistent and move along on that to Commissioner Bryen.
COMMISSIONER BRYEN: Thank you, Mr. Chairman. Today we're graced with two great negotiators and if I had my hat on I would take it off. You both have done a wonderful job. Earlier today I was talking about the trade balance with other witnesses. Last year China sold to the United States about $100 billion worth of goods and we sold about 16 to them, not very good. And if you look at this Department of Commerce chart -- that's our sales to China. That's their imports to the United States over the years and that's the going trade situation, the imbalance, which is not a very nice curve.
My question is, isn't it in our national interest to go down this -- if this doesn't change, is this in our national interest to have this kind of imbalance?
AMBASSADOR BARSHEFSKY: I think there are a couple of parts to this. First off, why is there an imbalance of that size? We know that trade imbalances, current account imbalances, tend to be a function of macro-economic factors rather than micro-economic factors. And I think it's important to recognize that in the context of WTO accession or trade agreements in general, notions that a good agreement will wipe out a deficit is preposterous. It is simply not going to happen. The aggregate imbalances are too large to be moved by single agreements.
On the other hand, what we find with trade agreements, and we'll find this with the WTO accession, is that with respect to industries for which concessions were gained, those industries often find substantial increases in market access, even if the aggregate imbalances don't change all that much.
Second of all, let's bear in mind that China also runs a substantial surplus with Japan, unlike most other countries with Japan, as you know, and a substantial surplus with the European Union -- neither as large as ours but nonetheless, quite substantial. So this is something of a systemic issue, not an issue that is necessarily directed, if you will, toward the United States.
And I think last, you know, there is always this question of who benefits from an open market. I believe firmly the United States is the greatest beneficiary in the world of a market that is relatively open and I certainly can't imagine how we would benefit economically by closing our market to any degree. In addition, China’s products tend to be at the lower end. I don't think that the China imbalance is necessarily problematic.
The overall trade imbalance as Alan Greenspan has said, is probably not indefinitely sustainable. But what will change those aggregate balances in toto, I'm not entirely sure, other than macro-economic factors rather than trade agreements.
COMMISSIONER BRYEN: Since 1996 the overall trade there was about $51 billion with China in terms of their imports to the United States and now it's about $100 billion and the improvement in our exports has been marginal in reality.
AMBASSADOR BARSHEFSKY: Yes, I think --
COMMISSIONER BRYEN: And I'm wondering whether Greenspan may have a point here. I mean, if this curve continues, then this could be not in our national interest. That's the point I was trying to raise. And it seems to me a challenge to figure out how to fix that. If you look at Japan, it's true they have a surplus but it's -- they had a -- let's see, they sent to -- they received from China $55.3 million of materials and they exported -- billion, I'm sorry, 55.3 billion and they exported to China 30.4 billion, almost double what we exported.
AMBASSADOR BARSHEFSKY: There's no question that our exports to China are anemic. We export almost half as much to Chile, which is a country of 14 million people, than to China which is a country of a billion three. So there's no question that our export performance needs to improve, and I think under the WTO agreement opportunity will be provided for it to improve. But I distinguish that from changes in the aggregate imbalances.
CO-CHAIRMAN MULLOY: I'm going to have to move it because we have four commissioners who have questions and we don't have a lot of time. Commissioner Becker.
COMMISSIONER BECKER: I have to be very careful in picking out this question. Well, we've heard the argument about PNTR. A lot of the proponents of PNTR were suggesting and sort of promising that if PNTR were granted and China came into the WTO, that their human rights record and their application of the rule of law would improve dramatically coming into the WTO. Yet when we were under the years of Most Favored Nations, the State Department compiled a report and they would submit it to Congress each year, over the last half a dozen years that I've followed it, their human rights record was considerably worse.
And now that we would grant them permanent PNTR doesn't have to go before Congress. What makes you believe that there's any chance for that human rights record to improve?
AMBASSADOR BARSHEFSKY: I think systemic human rights improvement in China has had virtually no relationship to annual NTR. Indeed, the argument of opponents of PNTR suggested ultimately that annual NTR had been ineffective in stopping increases in human rights abuses in China. I mean, you had an odd kind of argument. I think there are two basic points. First of all, I think progress with respect to human rights and religious freedom is not going to be linear. It isn't linear in any country. It hasn't been linear in Russia. I think you will see progress that moves forward by two steps and back by one and three-quarters or moves forward by two and back by three and then up by one and a half again. And I think we should be prepared for those kinds of variations.
But the second point I would make is this. If you look at China today, and you look at the China of 20 years ago, this is not the same country. If you look at standards of living, if you look at private property ownership, if you look at the ability to choose one's job, to move within, different regions of the country -- all elements that are critical ultimately to a broader notion of human rights -- 20 years ago these rights were not available in China, but they are today. So I think we have to take a long-term view of these issues and I think we have to remember that progress here is not going to be linear.
COMMISSIONER BECKER: Consistent with the approval of PNTR, China almost immediately announced that they felt our trade laws in the United States, particularly the anti-dumping and countervailing duty laws were inconsistent with the WTO and that upon them becoming a member of the WTO, they were going to challenge these laws or have them modified or repealed. How do you feel about that?
AMBASSADOR BARSHEFSKY: Certainly, any country can challenge anything they want but China would certainly lose.
COMMISSIONER BECKER: How do you -- maybe that's the answer I want. How do you feel about our trade laws in both countervailing and anti-dumping?
AMBASSADOR BARSHEFSKY: I feel quite secure.
COMMISSIONER BECKER: Quite secure.
AMBASSADOR BARSHEFSKY: Yes.
COMMISSIONER BECKER: One last little point; Commissioner Wessel had asked the question as to how you felt about the Republican's proposal on fast track. How do you feel about that?
AMBASSADOR BARSHEFSKY: I will confess to you, having been out of town and having just came back about 35 minutes before I was called here to testify, I don't know what the Republican proposal is or the specifics of it.
COMMISSIONER BECKER: Well, it's something -- I've heard you comment on it before with me about the exclusion of trade and environmental provisions and going forward with fast track.
AMBASSADOR BARSHEFSKY: That's disappointing because I would have thought in trade policy terms we'd made quite a bit of progress on those issues. You know, fast track is the kind of issue where this ideological -- I'm losing my words, too -- this kind of ideological purist view of trade, is not destined to be successful on Capitol Hill. The world has moved and should move beyond these kinds of sterile philosophical debates to talk about the ways in which trade can also be a catalyst for broader change.
I agree with the notion that with trade comes prosperity, with prosperity tends to come improvements in the rights of workers, tends to come improvements in the environment. But are these things fore-ordained? No. Can trade agreements make an important contribution in these area? Absolutely, of course. And it just seems to me disappointing to hear this. It seems to me that members up here ought to be able to get together on these very fundamental and important questions.
COMMISSIONER BECKER: Thank you.
CO-CHAIRMAN MULLOY: Thank you. Commissioner Dreyer?
COMMISSIONER DREYER: A question, I was interested in your statement that the common interest between China and the United States is a stable and secure East Asian system. And we certainly hear you say stability enough of the time but I wonder if that's really true because it seems to me from the United States point of view, that China is currently anti-status quo in the current situation in East Asia; for example, Taiwan. For another example, China claims the islands that the Japanese administer which the Japanese call Senkaku (phonetic) and the Chinese called the Diaoyutai (phonetic) and a number of disputed claims in the South China Sea and so on and so forth.
There are also against something we regard as contributing to stability in Asia which is our right in international waters off their coast. At the same time when China looks at the United States, they see a power that's profoundingly status quo that's trying to induce peaceful evolution of their government and other governments toward democracy that is constantly hammering at them about human rights and religious freedom and offending their sovereignty and so on.
So I wonder if when you get beyond the mantra that yes, both sides favor a stable situation in East Asia if there really is a common interest there.
ADMIRAL PRUEHER: Well, Dr. Dreyer, I tried to make a distinction between a rigid status quo and stability. And the – I would not try to argue China's view of what they would like to be more important. That was my Middle Kingdom point, Manifest Destiny point. They would like to be more important so that people asked, “What was China's opinion about things?” when they did things in their region or in proximity to them.
Also, if you look at the map that is the Guangzhou military region, they have a large tongue that sticks down into the South China Sea that they think is China's territory, their traditional territory such that people ought to come seek their permission to enter. That's anathema to us and to freedom of the seas Ö though we have not ever ratified the UNCLOS convention. What China wants to do is economically to deliver some better living to their people. They would like to be more important in the region. They will take advantage if they can, not unlike other nations.
They make the argument, which you can argue, that they are not expansionists in their view, though if one looks at the South China Sea you see they seek expanded borderlines. China has not contested troops in Korea. They have not contested troops in Japan. They've not contested U.S. presence in the region. In fact, they have looked at that over the last few years as providing stability but against the Soviet Union in the past. This tone could change and one can hear that in some quarters.
So I think this is a work in progress. My statement about a secure and a stable East Asia Pacific is one where both of us can pursue political stability, economic stability and in fact, military stability in the region that's a common interest. I would expect you to take me to task on the idea that stability in the Taiwan straits is a common interest. I think that's actually a little more perverse point than the one you're making.
COMMISSIONER DREYER: I was trying not to link it specifically to Taiwan because I think there are broader considerations. Again, if you read the Chinese newspapers, although maybe the Chinese have not formally contested the issue with you, there’s the issue of the American troops in Japan, the Chinese have certainly reprinted a lot of the anti-troop protests in Okinawa and --
ADMIRAL PRUEHER: They reprint a lot. It's hard to sort the wheat from the chaff.
COMMISSIONER DREYER: Indeed.
ADMIRAL PRUEHER: Yes.
CO-CHAIRMAN MULLOY: Thank you, Commissioner Dreyer. Commissioner Lewis.
COMMISSION LEWIS: Thank you very much for your presentations. They are very informative. A couple years ago, the Chinese leadership banned the PLA from participating in business enterprises. What's the present status of that?
ADMIRAL PRUEHER: This is very -- an interesting point because the leadership did that in '97. And two months, after in talking to the PLA leadership they told me, "Well, PLA business has been banned so we are out of it.” Right. The PLA has gotten out of some business enterprises. The PLA grew up as a guerilla type army. They're supported from the Provinces.
They have their own businesses.
COMMISSIONER LEWIS: They're still doing it.
ADMIRAL PRUEHER: They're still doing it.
COMMISSIONER LEWIS: Do you have anything to add to that?
AMBASSADOR BARSHEFSKY: No, the only point I'd make, though, is that I thought the announcement was in part, convenient at the time.
COMMISSIONER LEWIS: That was right.
AMBASSADOR BARSHEFSKY: And it may or may not have related to this but it was an announcement coincident with the announcements on the reform of state enterprises, which raised the question in my mind, were they basically telling the PLA, "As to non-economic state enterprises, we don't care if you're in them, you've got to get out because we want those enterprises to close.
COMMISSIONER LEWIS: Right.
AMBASSADOR BARSHEFSKY: So I always wondered whether there was a connection there, but the notion that the PLA is out of business in China --
COMMISSIONER LEWIS: Is not true.
AMBASSADOR BARSHEFSKY: -- Is not true.
COMMISSIONER LEWIS: Okay.
ADMIRAL PRUEHER: May I add one point? In addition to the economic part, there is the part about trying to diminish the influence of the PLA. It came concurrent with a business reduction, there's no PLA on the Politburo, so that's an attempt of diminution of the influence of the PLA in China.
COMMISSIONER LEWIS: Thank you, that's really interesting. In terms of the trade imbalance between the United States and China compared to China and Europe, there's a theory proposed that the Chinese are trying to amass large amounts of our treasuries because five years ago or six years ago, the Japanese Prime Minister hinted they were going to stop buying treasuries, and in the next couple of days, the stock market went down.
AMBASSADOR BARSHEFSKY: Right.
COMMISSIONER LEWIS: And he had to say, "I really didn't mean that". Well, there's a theory now that the Chinese want to amass large amounts of treasuries to have leverage over our financial system. What's your reaction to that? That nothing happens in China by accident and that they're buying from us much less than from Europe not just by accident but as a national policy.
AMBASSADOR BARSHEFSKY: I don't think I'm equipped to respond one way or another except to say that on balance, I don't assume all relations with China are based on fundamental mistrust, which is a little bit what you were getting at, but I feel not --
COMMISSIONER LEWIS: I'm sorry, a Chinese writer has written that, that there's many ways to wage war, one of which is financial. This in the public realm.
ADMIRAL PRUEHER: Yes, I agree with that point, there are many ways to wage war and Premier Zhu says with a smile sometimes that he is the largest holder of U.S. Treasury bills.
COMMISSIONER LEWIS: There you go.
ADMIRAL PRUEHER: Yes.
COMMISSIONER LEWIS: Do you have any references of that being in writing?
ADMIRAL PRUEHER: Not in writing.
COMMISSIONER LEWIS: But he said that to you.
ADMIRAL PRUEHER: But he's said it a couple of times, yes.
COMMISSIONER LEWIS: That's really very interesting. I'd like to ask you, if the WTO fails, if they don't join the WTO, will that help the hardliners?
AMBASSADOR BARSHEFSKY: I think if they don't join the WTO because they've decided they're not going to, that decision would have been made by the hardliners.
COMMISSIONER LEWIS: If they don't join the WTO because we don't let them in, would that help the hardliners?
AMBASSADOR BARSHEFSKY: It would be -- yes, it would do everything possible, just as in April '99, to strengthen the hands of the hardliners against the reformers. There's no question about it.
COMMISSIONER LEWIS: Okay, and then finally, China is repressive. They're better off than they were 20 years ago, there's no question. But suppose it turned, they joined the WTO and they become more repressive and things occur there that are more antagonistic to our values; how bad does it have to get before you finally say, "We're not going to trade with you", or do you never say that?
AMBASSADOR BARSHEFSKY: I think that's ultimately, frankly, a call for the Congress. I think it's hard to imagine getting to that point if only because it is, at least at this juncture, hard to imagine things getting that bad. One needs to remember --
COMMISSIONER LEWIS: Well, we traded with Nazi Germany right up to the war and with Japan right up to the war.
AMBASSADOR BARSHEFSKY: I think we would just have to see but I think you're positing a situation that is so extreme, so extreme, like Japan immediately pre-war or Germany immediately pre-war, that one would like to assume one would not have to cross that bridge.
COMMISSIONER LEWIS: Well, Milton Friedman told us in the other Commission that if Nazi Germany were alive today, we should be trading with it. I mean, so that can occur.
And then finally, why do you think China wants to join the WTO since they now have access to our markets and you mentioned in your statement prosperity, security and international respect. I mean, those wouldn't be the reasons why they want to join the WTO. Do you think it's to lock in access to our markets on permanent basis?
AMBASSADOR BARSHEFSKY: I think it has to do with a variety of factors. One is international respect, the notion that it is an international player. One is --
COMMISSIONER LEWIS: Those are factors you think are important.
AMBASSADOR BARSHEFSKY: They are among the factors. One is its ability to help formulate the rules of the road. Right now, China doesn't formulate the global rules of the road. It's the Western governments that do. This would give China an opportunity to help formulate the rules. That is significant.
A third is better to ensure that its trade is governed by the same kinds of protective rules as our and Europe’s trade is.
COMMISSIONER LEWIS: Do you think the non-hardliners are trying to lock it in because it's a way to open them up more to the world?
AMBASSADOR BARSHEFSKY: And I think for the reformers, WTO accession is the perfect compliment to economic reform internally generated. In other words, we see a very interesting pattern. If you look at the former Soviet Republics, or even take Laos or Cambodia, you see these governments wanting to effect internal reform. They can't because the traditional monied interests are so powerful and entrenched. So what do they do? They join the WTO. They are then subject to a set of international obligations. This is then beyond domestic politics. They take those new international obligations back home and say to their public, "We have to do it. We have an international treaty that compels us to do it".
We see this pattern quite frequently with many, many countries and with respect to China, we see something quite similar. That is, Zhu Rhongji in particular sees WTO accession as a way to cement internal reform in China long after he's gone.
COMMISSIONER LEWIS: Thank you very much. Thank you.
CO-CHAIRMAN MULLOY: Before you go, I haven't asked any questions. I want to ask one. The WTO, we would overwhelm the WTO it seems to me by bringing a lot of disputes into the WTO. It would be better to try and work them out before you get there. The second premise is Professor Cohen points out that they really don't have the adequate legal structure to resolve many of the disputes which are going to arise.
So the question is that with the EU now, it looks like we're trying to work out some mechanism outside the WTO to resolve matters. The interlocutory with the Commerce Department and the Joint Committee on Commerce and Trade was MOFTEC. I thought the feeling within the U.S. Government when I was there was that we didn't get enough leverage inside the Chinese bureaucracy dealing with MOFTEC to try and resolve these disputes, that we needed to get it up higher into some other mechanism.
Do you think that should be something that this Administration and we should really look into and press for, to try and find some way to do that?
AMBASSADOR BARSHEFSKY: There is no question that for resolving certain disputes with China there is no substitute for direct contact with a political level sometimes considerably in excess of MOFTEC, their trade ministry. On the other hand, I wouldn't discount the use of things like WTO dispute settlement. Certainly I wouldn't discount it before we use that approach but I think basically a dialogue between China and the U.S. Government at a higher political level, on a routine basis would be advisable.
CO-CHAIRMAN MULLOY: Do you agree with that, Admiral?
ADMIRAL PRUEHER: Very much.
CO-CHAIRMAN MULLOY: Would you both think about where that -- we were trying to figure where that ought to be and if you could both think about that and give us something, that would be enormously helpful.
AMBASSADOR BARSHEFSKY: Well, I'll give you just one suggestion off the top. We have annual summits, semi-annual summits with Europe, for example and with many, many countries, at which their top ranking political people and our top ranking political people get together. In the U.S. Government the top ranking political people are Cabinet Secretaries. In many foreign governments it's actually not the case.
In China, the equivalent to the cabinet secretary is not the minister of X ministry; it's the State Council and so, at a minimum, one would want an established dialogue between the Cabinet in the United States and the appropriate State Counselors as well as the direct analogue which would be the Trade Minister, Finance Minister, Foreign Minister and so on. But you want the State Council level. That's the ultimate political level, and a critical locus of decision-making.
It was for WTO. It was for textiles, it was for intellectual property rights to be sure.
CO-CHAIRMAN MULLOY: Thank you.
ADMIRAL PRUEHER: That will be true and also in the regulatory world the State Development and Planning Commission, Zung Peiyan, is --
AMBASSADOR BARSHEFSKY: Key.
ADMIRAL PRUEHER: -- carries a lot of water.
AMBASSADOR BARSHEFSKY: Key.
CO-CHAIRMAN MULLOY: I can't tell you how much the Commission appreciates both of you coming with us today and spending time working through these issues. I hope we can, you know, count on you in the future if we have additional materials.
AMBASSADOR BARSHEFSKY: It would be my pleasure. Thank you so much.
CO-CHAIRMAN MULLOY: Thank you very much.
ADMIRAL PRUEHER: Thank you.
CO-CHAIRMAN MULLOY: Off the record.
(Off the record at 1:51 p.m.).
(On the record at 2:30 p.m.)
CO-CHAIRMAN MULLOY: Okay. I want to apologize the witnesses. We ran over in the morning session and we had a little business meeting we had to take care of and then we rushed back. And I'm sorry that we're later than we had anticipated.
We have -- this is the third panel of witnesses that the Commission will hear from today and we're going to hear from Mr. William Wolman, the Chief Economist of Business Week magazine, who is accompanied by his wife and New York financial journalist, Ann Colamosca, and co-author of the book The Judas Economy.
In addition, other testimony will be presented by Jerome Cohen, a Professor of Chinese law at New York University Law School and one of the Deans of American Study of Chinese Law and Institutions. Kevin Kearns, the President of the U.S. Business and Industry Council and Rupert Hammond-Chambers, President of the U.S./Taiwan Business Council.
Again, I want to thank each of the witnesses. There was a lot of thought that went into the preparation of your prepared testimony and Commissioners have all had a chance to look at it and we'll be asking questions, but in your formal presentation now, if you could limit yourself to 10 minutes and it will be timed. And when you see the red light, if you could wrap it up so that we could have time for the Commissioners to ask questions, I would really appreciate it.
So with that, let me call on, in this order, if I could, Mr. Wolman and Ms. Colamosca can go first. We'd appreciate that.

MR. WOLMAN: Thank you very much. Neither Ann nor I are deeply prejudiced by knowledge of what's going on in China, but we did write a book on the impact of globalization jointly which interested some of the Commissioners and so -- and you invited us and thank you very much. And it's basically on the impact of globalization that we will talk. It's fairly clear that at the end of the Cold War was a transformative thing in the world economy. It is a summing almost on the base -- on the level of discoveries which opened America to the thrust of a world economy in which globalization was already beginning to occur.
I don't want to belabor this point but America's victory in the Cold War and the simultaneous sort of disintegration of the Socialist model of development opened the entire world to the free market economy in varying degrees. I'm over-generalizing here but in varying degrees, but that certainly happened. The net effect of that will, in the end, be extremely important. The best way I can summarize this is that before the Communist world and the world relying on Socialist models sort abandoned those views each American worker competed with four workers, roughly speaking, in the world.
At this moment of time, this is in our book, each American worker competes with 20 workers around the world at least potentially. The potential competitors to American workers has increased by a very large factor. At the same time, of course, as the American workers faced more competition, there was an explosion in the demand for capital around the world.
Capital suddenly became free to move around the world. It is in the nature of the world, so to speak, that capital is more mobile than labor and the net effect of this, of course, was that capital began to find places where it could economize on labor in ways it could never economize on labor before because of the way things worked.
Now, this is in stark contrast to the entire history of the United States, the Frederick Jackson -- the world of Frederick Jackson Turner and before that the world of Adam Smith. The wonder of this country in its early stages was, of course, that the average working man, that's a generalization, did far better than the average working man in Europe. When Adam Smith wrote The Wealth of Nations or published it in 1776, he spoke in that of why the American worker was doing so well as compared to the average European worker.
And the answer roughly speaking is that he had more resources to work with. The ratio of men to resources, especially land and the capital use of the land is relatively low in this country so workers could prosper.
Now, flip this situation around, which is what's happened since the end of the Cold War, has really changed the Frederick Jackson Turner world and basically what you have now is a world in which American labor is abundant relative to American capital because the opening of the world has obviously been a magnet for capital around the world.
What is the evidence of this? Profits have really grown fast as compared to wages and the real GTP since the end of the Cold War and even before that when the country -- when the old Soviet empire tended to disintegrate. So under those circumstances we had a relative decline in the position of the American working man.
The first effects, of course, was in goods production which was in manufacturing. There will, however, be important secondary effects which already are starting which will really become intense in white collar work and then finally in the work of the elites of the American work force.
The kind of guys that I went to Stanford with was not smart enough to do the same thing they did, the guys who invented the computer and became electrical engineers and stuff like that.
And to speak of that, Ann.
MS. COLAMOSCA: Just very briefly, I have a long term interest in covering work issues and I started out in the '70's as a staff writer for Business Week and I ended up, the major story that I covered actually in my hometown was the de-industrialization of Philadelphia, the loss of blue collar jobs. And you know having come from a blue collar family, I knew a lot of the people involved. It's still going on and it was a very painful story. So I have covered that story on and off over the last 25 years.
In the mid-'90's we were in the middle of a book and after doing, you know, a fair amount of interviewing, people told us in Bangalore and we spent quite a bit of time with -- his name is Narayana Murthi and he is really the father of the software business in Bangalore and at that time, it was about a $1.5 billion business and by 2008 McKenzie and Company says that it will be somewhere around an $18 billion business. The environment around Bangalore is just in some ways -- I wasn't working then but it reminds me of the environment in Philadelphia in the '50's and '60's before it started loosing all of its blue collar jobs and, you know, there's -- first of all, there's a paternalism among the businessmen, really are, you know, helping the workers and there's a real feeling of excitement.
And I think that Bangalore will really end up being a model, you know for all of Asia. They started out in the mid-'90's doing -- really doing back office jobs for people like CitiBank and Mruthi himself is really aware of the fact that he has to -- that he has to supply more high income jobs for the people in Bangalore because work like transcription is already starting to disappear because of the technology of voice recognition. So they are really working now -- actuarialy work is now being done through software applications, accounting work, graphic design, and those kinds of jobs are just in their early stages.
And I just think that it's something that we all have to be very, very aware of. There are all kinds of partnerships, you know, that can and will be done among all kinds of international business groups and this thing is already spreading. It's being done in the Philippines and there are some software companies in China. So this is just the very, very beginning of what we see, you know, as the erosion of white collar work.
And if you read Ruy Teixeira and Joel Rogers' book, America's Forgotten Majority, Why the White Working Class Still Matters, the numbers involved show an erosion of wages in this group from 1973 to 1998 and there was, you know, a blip in '99 and 2000. But I think because of the combination of technology and software, well, software technology in India and China, the combination will see a continuation of erosion of wages in middle class jobs and there's just much, much more to report and we have to I think start looking at this thing very closely and really start monitoring it.
MR. WOLMAN: I think the last point I want to make is we should have no illusions about anything. One illusion we should not have it that our elite workers, what I call our elite workers, are going to continue to be elite workers. You know, I went to school at Stanford, and to repeat, I was dumb enough to be interested in economic history and stuff like that, you know, and not in the stuff that would have made me a programmer, actually a guy who could do computer languages.
That was a hot spot in world -- and still is a hot spot in world technological development and a lot of what happened in the United States had to do with the development of very specialized hot spot type things, like that industry. It is an illusion to think that that kind of development will be confined to the United States at this point. The interest in this kind of work is enormous around the world. The excitement generated by the net and the computer is very great.
When I was in India at the same time as Ann, you could just -- in incredibly difficult circumstances, you could just sense the excitement that was involved in this kind of a world. And I've never been to China but I'm sure there are places in China where this has got to be true as well. So we can't even assume that, you know, our vaunted leadership in -- you know, in the highest htmect of tech will continue unchallenged because the same forces that were unleashed here will be unleashed abroad as well and under those circumstances, it seems to me we have to pay attention to this kind of thing.
We should be aware above all, I'm going to stop at this point, that the world facing the American worker is a fundamentally changed world, that the United States at this time does not live in the world of Frederick Jackson Turner, okay, in which the frontier is there and American workers automatically have a lot to work with. The facts of the matter are that capital in some sense is being spread around the world and becoming relatively scarce for Americans.
In case you guys don't know it and I'm sure you do, okay, up to about 1998 the amount of capital per worker in the American economy actually had declined for about 20 years. It just picked up a little bit in the last few years. We should not -- and fundamentally, and Ann and I argued this in the book, that the reason we have high employment and low unemployment in this country was because labor was cheap.
That was the basic reason we had it and it may well be, okay, that given what's going on, okay, in the world right now, that it will be a continuing problem to have the standard of living of the average American rise, because labor has got to be cheap for capital to be willing to employ it.
Thank you.

CO-CHAIRMAN MULLOY: Thank you.
Mr. Kearns?

Mr. KEARNS: I am Kevin Kearns from the U.S. Business and Industry Council. I am very pleased to be here today. I see so many friends and associates on the panel. It's a real pleasure to be able to testify before you. I'd like to associate myself with the remarks just made by Bell Wolman and with the excellent book The Judas Economy and recommend that you do read it if you have not yet.
At U.S. Business and Industry Council, our bottom line is simply this: that no one wins in America unless everyone wins. The purpose of the American economy is to create a high standard of living for all Americans, not just certain elites. We have had an economy since the mid-'70's where we've left increasing numbers of Americans with stagnating incomes. For families that problem was addressed first by sending large numbers of spouses into the work force in the 1980's, then kids working part-time jobs, and then finally by easy access to credit to try to keep up a family’s standard of living.
But as these American workers compete with workers around the world, it is becoming increasingly difficult for them to keep up that standard of living. And the -- I call it a cult, the cult of free trade in this town seems to think that the market economy or markets will solve all problems. I think nothing could be further from the truth. Markets don't take into account national standard of living; they don't have a political dimension; they don't have a national security dimension. And these are the htmects of our China policy and specifically our trade policy, that have been missing to date. So I'm very pleased that the Commission is taking up a number of htmects, especially the security policy, of our overall political relations in the context of trade and economic relations.
We believe at USBIC that our current trade policies toward China are doing irreparable damage to the American economy. The China trade surpluses made available through our very unbalanced two-way trade now approaching $90 million represent, an invaluable subsidy to China, and best estimates are that precisely monies in this range are spent by the Chinese on weapon systems, on their military. China is a country that regularly challenges U.S. national security interest in East Asia and, in fact, around the world through exports of various weapons and nuclear technologies.
In addition, U.S. multi-national companies routinely transfer advanced technology to the Chinese, which also enhances their weapons development. When I was a staff member on the Senate Foreign Relations Committee, Senator Helms had me write an amendment, this was in 1989, that said no U.S. satellites should be exported to China for launch on Long March rockets until they, that is the Chinese, stop providing weapons of mass destruction to a number of named terrorist states.
The amendment carried in the Senate and was defeated in the House, but that was 12 years ago. People could certainly see the Loral and the Hughes problem coming, people who wanted to see it could see it. Long March rockets blew up a lot, so even though the launch was cheap, you had to pay an awful lot of money in insurance to put your satellite on a Long March rocket. The way around that for the companies -- to still have the cheap launch and save on insurance costs, of course, is to improve the capability of the rocket, which, as you all know, has military as well as commercial applications.
Another critical development in East Asia that I would like to highlight is the fact that as our market has remained open to Chinese goods over the last decade and a half in particular, we have crowded out investment, foreign direct investment, in friends and allies in Asia. And that investment has gone into China. So we have, in fact -- our policies have in fact, significantly damaged the economies and societies of countries that our security strategy aims to strengthen and defend. So there are of course, strategic and geo-political consequences from our international trade policies.
Almost all of Asia has export - led economies which are in direct competition in the U.S. market, and the U.S. market can't sustain them all. U.S. Successive White Houses have been unable to connect the dots between the economic gains and the national military strength in these economies. This is something that Beijing calls comprehensive national power. We don't look at that at all in our trade policy. Free trade isolates simply on the economics, free trade and its adherents which are generally politicians and multi-national corporations.
So China is in a struggle with America's traditional allies in Asia and the contest is for export markets and capital as Bill Wolman has said. China and the Rim countries are all trying to advance up the same ladder in the same way and there's not enough room for all of them on the ladder. During the Clinton years, China more than doubled its share of the U.S. market, mainly at the expense of these Rim rivals. Its 1994 devaluation brought it a lot more business and investment and, in effect, paved the way for the 1997 financial crisis, which weakened the states that, again, are friendly to the U.S.
At USBIC we want to see manufacturing and the jobs associated with it remain in the United States. If they have to go somewhere overseas, we don't want to see them go to an unfriendly or hostile power and that is, in effect, what's happening.
We have examined in great detail corporate investment in China, and we believe that the evidence indisputably shows that most of this investment is targeted at serving the U.S. market, that is U.S. corporate investment in China is targeted at serving the U.S. market and not penetrating the domestic Chinese market, or it's targeted at serving other markets in East Asia.
What this means is that we are not exporting American-made goods, and let me give you the trade theory. If American goods are competitive in terms of price and service and quality, et cetera, we should be able to simply export them from the United States and penetrate these markets. Because the Chinese Government is involved in making sure that there are in effect no real labor unions, their or environmental policies -- all the regulatory htmects of doing business in the United States do not exist in China -- therefore, making it quite cost efficient to manufacture there, so we can't export our goods from the United States to China.
It is not a level playing field and the lopsided ratio of U.S. exports to and imports from China, which is the widest among any American trading partner, indicates there is something clearly wrong here. The Federal Reserve Bank of New York has estimated this estimate was done for the year 1996, only four percent of U.S. exports to China were consumer goods and only 20 percent of the total exports to China made it into the Chinese market. Thus 80 percent are capital goods or sub-assemblies, which are turned around and come back to the United States or other countries.
Between 40 and 50 percent of Chinese total exports are now sold to the United States. And that gives us tremendous leverage with China. You know, it's really interesting to see every year during the MFN debate, the previous years when we had the MFN debate, the first thing that the Chinese would do would be to threaten to close their market. "If you stop MFN, we're going to close our market to your goods.” And the multi-national corporate line here in Washington is, "Oh, my gosh, you know, we can't do this," but the fact that the Chinese themselves, that's their first resort in terms of a threat to try to change American Government behavior and thinking, indicates that blocking Chinese exports to the United States would have some effect, otherwise, they wouldn't use that argument in reverse on us.
We're particularly concerned with the plight of America's small and medium-sized manufacturers whom we represent. I can tell you many stories. One quick one, the General Motors plant in Shanghai put out an RFP, request for proposal. In that proposal it says, "If you get this contract", American subcontractors, "you will transfer all your technology to a Chinese partner. You take a joint venture partner and transfer it over five years". Well, at the end of five years, guess who General Motors is going to be supplying from? Not the company that I represent in rural, Tennessee which employs 400 Americans, but they're going to be supplying their worldwide operations out of China.
So there's a real split, as we see it, in American business between what the multinationals want and what smaller manufacturers might want. And we see over time, not only are we losing control of our security policy, but we're losing control of our economy. If the multi-nationals are supplied by Chinese firms, it gives the Chinese or whatever government it happens to be, but in this case the Chinese, tremendous power over the multi-nationals.
If I could make one final point in one minute, there is this nonsense notion that free trade is going to solve all problems. First of all, I don't see much free trade in the world, otherwise we wouldn't have to negotiate all these trade agreements. If anyone were interested in free trade, they could sign a one-page document that says, "We agree to remove all barriers, tariffs, et cetera, immediately and open our markets". So we have highly managed trade; but there's this notion that free trade equals democracy and democracies are always friendly. Someone who tells you this -- that China is going to be a democracy because we trade and, therefore, friendly to the U.S. -- is selling you a bill of goods. It ignores Chinese history; it ignores the history of trading among European states, for instance, in the 19th and early 20th centuries. It's simply unsupportable based on the evidence.
China is going to do what China wants to do. Japan is a democracy. We have many economic problems with them. With China we will have economic and security problems as well. So it's simply happy talk to assume that we trade with China and there are going to be no problems in our relationship. Thank you for the opportunity to testify.

CO-CHAIRMAN MULLOY: Thank you, Mr. Kearns.
Professor Cohen?

PROF. COHEN: Thanks. I've had a very good time here since 9:00 o'clock and I've learned quite a lot. And now we're going to go more from the macro to the specifics because I was quite interested in your discussion with Ambassador Barshefsky, particularly you're obviously focused on enforcement. Enforcement is the name of the game in dealing with China in many respects and today I've been asked to talk about the legal htmects of the accession of China to the WTO and essentially cover four questions.
The first is, what are the legal commitments that China is being asked to fulfill. The second is, is China now ready to fulfill those commitments. The third question, since we know China isn't by and large ready to fulfill all those commitments is how long will it take and the fourth is, what will it take to enable China satisfactorily to fulfill those commitments.
So first the commitments are familiar to you, I suppose by now. One is so-called transparency. That means we need to know not only at the central level, but the local level, what are that laws, what are the regulations, what are the administrative rulings of general applicability and what are the relevant judicial decisions? How can we find out about them?
The second question is, to what extent can China now produce uniform impartial administration of all these rulings, laws, regulations, judicial decisions, administrative rules, et cetera. Can we expect uniform application and if not, what can be done about it? And the third commitment of course, they're supposed to provide an institutional arrangement for objective, impartial, independent review of how they have fulfilled their rulings, et cetera.
So you have do we know about the rulings, what are the rulings and how do we get review of any failure alleged to live up to the rulings. Well, on the first question, transparency, I should say first of all for someone who's not in the U.S. Government, to try to learn what the commitments are that China is being asked to make raises a serious question of transparency in the United States Government, because it took me quite a few phone calls and we talk about guanchi's importance relationships in China without guanchi in Washington, I wouldn't even know how to focus on this question to you.
But as I understand it now, and nothing has been made public yet, China's commitment with respect to transparency is first of all, they are going to publish and make readily available all these relevant norms, including so-called maybe wongen, internal documents, normative documents that aren't normally available. I've sat across in 20 years of dealing with China at many negotiating table where actually in some cases they have the regulations in their laps and they keep it sort of under the table, like a good poker player. And they say, "I'd like to tell you what these rules are and why they're against you, but I'm sorry, I can't show them to you".
And supposedly we're now going to do away with that. Now we've heard that before going back about 15 years in our talks with MOFTEC, but I think this may have some teeth in it and all I can say is we'll put them to the test, I assume. The second -- under the normal WTO system, a country is supposed to have a so-called single point of inquiry where you can go and get all relevant local as well as national legal regulations, judicial decisions, et cetera. It's quite unrealistic.
I don't know any place in the United States where we can meet that single point of inquiry and China fortunately our negotiators have realized it's quite unrealistic to think there's just going to be one place but they seem quite confident that the Chinese are now committed to have at least a number of points of inquiry, particularly journals, particularly Internet sites where these norms that are supposed to be transparent will be, indeed, readily available.
So I hope we can say goodbye to the old internal documents and I think prospects for complying with this transparency requirement are good. It's not going to be done this year or next year. It's going to take several years. And it will be expensive, burdensome but I think it's quite doable. I think China will do it because I think they know it's in their interest to know better what's going on in their country, especially in light of the eternal struggle between the central government and the local government for who was going to control day to day activities in any given field.
And the real questions are will these norms that we gradually know more about, will they be evenly, fairly carried out and if not, what can be done about it? Will there be adequate review? China has agreed, apparently to establish an inquiry point within the central government not yet identified, an office, to which anybody with a grievance about the way the law is being applied to them in Guanchi or Beijing or wherever can go. Now, that office is supposed to have a real budget, a staff, be effective, given the proper support from the government and they're not only supposed to receive your grievance but to do something about it and that would be important.
In my dealings with China, including these recent criminal cases where people are locked up and one of my clients was here this morning, his wife is an American university teacher, has been locked up since February 11th.
In all these cases, civil or criminal, the terrible thing you encounter in dealing with China is, putting it in imperial Chinese terms, how do you ring the imperial gong? How do you get the attention of the central government and the situation cries out for somebody to be available to hear you out and to provide you with a remedy and that's what this office is supposed to be, an office where if you feel the law is being misapplied to your case, you can go and they're going to do something about it.
As I say in my formal statement, to those of us who work every day in China, China is not a totalitarian dictatorship, except with respect to the Folun Gong religious sect they feel so threatened by for reasons they fail to make clear, where so-called espionage cases. The resources available and applied by the central government to any given activity are actually too limited.
China is a weak state in most respects and if you talk about the protection of intellectual property, the enforcement of environmental protection, the enforcement of securities, stock exchange regulation for example, China's central government is not strong and that's the reality and will it be strong in this respect with respect to the office that's being set up to cure these problems? I think expectations have to remain modest.
As I say in my paper, China is more like a series of futile baronies than an effective to totalitarian dictatorship. So what do you do about it if you're not getting the administrative actions that you feel are fair, just and due to you? Is there some institutional review available? Normally, the shorthanded people say the judicial review requirement.
But actually it isn't a requirement that there be a court that review potentially arbitrary administrative action. It's a requirement that there be some effective, fair, independent institution. It need not be a court but in most places we function with courts, we focus on courts.
Now, China has done a lot since 1978 to build a legal system. In 1978 China really was a shambles with respect to laws, with respect to many things. I'm the glass is half full. I give you an account that shows a mixed picture, but the courts have made considerable progress and legal education and all the underpinnings are making considerable progress but it's not enough. Right now, I cannot tell you that the courts provide an adequate, fair, consistent, independent review of administrative actions but they're doing better. In some cases they really do and I'm impressed.
In many cases, however, they don't. They don't have the professional level yet. They don't have freedom from corruption. Guanchi, the social network of relations in which judges are embedded really is perhaps the greatest vice. The courts are nominally independent of the administration.
CO-CHAIRMAN MULLOY: Mr. Cohen, I know the red light has come on but, I just want you to realize that you don't have to stop. This is of such interest to the Commission and since you and Commissioner Lilley were college classmates and have added so much to our knowledge of China, we want you to continue until you feel --
PROF. COHEN: I'm sorry, I won't be much longer but I do look forward to the discussion --
CO-CHAIRMAN MULLOY: Continue on. Absolutely.
PROF. COHEN: -- because I've heard your questions this morning and I know this seems to be responsive to your interest. Nobody's interested in empty clichés that aren't going to prove workable.
I think the critical factor with reform of the courts, the critical factors are not these bandaids that the Supreme Court is now in the process of putting on a very, very serious illness. They are making some important reforms but the critical factors are structural and we don't see so far a willingness in the leadership of the Chinese party and government to make those reforms.
If they wanted to really stop local protectionism that's such a vice and deprives not only foreigns but people from other cities and provinces of a fair judicial decision, very often when they go to a particular locality, they know how to do it. The Manchu Dynasty knew how to do it.
They didn't let their judges come from the place where they worked, and when they assigned them to some other place, they only kept them there three years. They didn't want them to have this network of connections that corrodes the judicial process. They could move the power to appoint judges up to Beijing to promote, compensate, fire. That power shouldn't be at the local level because it puts judges in the hands of the same people who own the companies that come to court and that bias the judges in terms of not giving a fair hearing to outside interests.
Moreover, real reform in the Chinese judiciary would require the end of the Communist party control over specific cases decisions. In China today, the party political legal committee that controls every area's court system, also controls the police, the prosecutors, the judicial bureau and they are the real power of determination. They can tell the court leadership what to do and the court leadership in turn, can tell individual judges what to do.
Will we ever see that kind of reform? We almost saw it in the late '80's. Zhao Ziyang, before he was removed, as a result of the Tiananman crisis was really trying to do that, get the party out of specific judicial decisions. But there was a big setback. It hasn't happened yet and yet forces like WTO accession are really gathering strength again, and it's coming. In the meantime we should remind ourselves courts aren't the only way to guarantee this kind of review.
And something interesting has happened recently. Last March 2000 China put out a so-called law on legislation. It's trying to rationalize and clarify the relations of all these different norms and hierarchies of norm makers and in it is really an interesting set of provisions that for the first time says if an individual or a company, foreign or domestic, has a grievance against an administrative action, there's now a process by which it can go and not only get compensated, we already have that at least in principle, but invalidate the administrative action by going at the national level to the standing committee of the National Peoples Congress, not a court but a political agency. Now, that's a really interesting idea. I'm excited about it. I've talked to many Chinese lawyers about it. They seem cautious.
The scholars are hostile because the scholars were disappointed in that law. They would like to see an independent constitutional court in China. That's not in the card politically for a long time. I think they ought to use what they've got, which is the basis for creating in this legislative body a standing committee of the NPT, a semi-adjudicative body, not so different from what took place in England over the centuries, where you had the judicial committee of the Privy Counsel in the House of Lords.
This is an opportunity that lawyers should be exploiting. I think the regular judges are not happy with this. They'd like to have the power to invalidate legislation. They've been denied that. Nobody has confidence in the courts including the leadership of China. And there's a rivalry between the courts and the standing committee of the National People's Congress or who's going to have power. So it's an interesting situation. What can we do about it finally?
I think China is going to be able increasingly to meet these requirements of uniform administration of rules and eventually will have some form of adequate, at least in a formal sense, review of administrative action but will it be independent? It's not going to be really independent unless they get serious about this. They want help, however, and the more help we can give them, the better.
I think we ought to let this process of China's integration with the world continue for reasons many people have evinced this morning and we ought to be cooperating with them. When President Jiang came here in September '97, he and President Clinton made an agreement. One of the so-called baskets of the agreement was legal cooperation. Nothing happened afterwards to implement it.
Clinton went back to China in '98. They reiterated the importance, again nothing happened. It's only very recently that the Congress has shown some awareness of the importance of putting our money where our mouth is.
It's not good enough just to get up and make speeches that play in Peoria about the beauty of human rights and how China needs a rule of law. You've got to help them and they're asking for our help. And I think we ought to take them up on it and finally $2 million did get appropriated last year and I said in my talk I hope in my lifetime the state department will finally move itself to distribute that money.
And in next year's, this current budget, I understand there's $5 million in the budget. So there is some hope but that's a drop in the bucket. And when you think, as I say at the end of my talk, what a missile costs or a bomber, and you think of the potential importance of the growth of law in China and what it means for American values, for American security, indeed, and for American business, including labor and farmers, and what it means for Sino-American relations, I think it's worth the cost of a few bombers.

CO-CHAIRMAN MULLOY: Thank you very much, Professor Cohen.
Mr. Hammond-Chambers.

MR. HAMMOND-CHAMBERS: Commissioner Mulloy, thank you very much, indeed. I'd like to start by saying what an honor it is to testify today. I wish to start by briefly addressing the questions posed in your letter of invitation detailing Taiwan's intricate involvement in China's economic development and how the United States is becoming increasingly involved in that triangular relationship.
Taiwan's Board of Foreign Trade calculate Taiwan's exports to mainland China in 2000 at $26 billion with imports from the mainland at $6.2 billion, making Taiwan's trade surplus to China in 2000 the highest on record at approximately $20 billion. It's important to note that Taiwan prohibits a significant number of goods and services from being imported from China and therefore, we see a consistently high trade imbalance between the two.
If we consider the amount of investment that Taiwan has in the PRC and vice versa, Taiwan's government heavily restricts direct investment in China. In spite of these restrictions, domestic companies and individuals have invested about 50 billion in China over the past decade according to an estimate by Taiwan Central Bank. Taiwan companies have become adept at using offshore banking such as the Cayman Islands to route investments that would be deemed too high under Taiwan's law. Around 40 percent of Taiwan's total foreign investment is in China and two-thirds of that amount is invested in electronics and high technology.
A survey by the Ministry of Economic Affairs shows that 25 percent of companies in Taiwan plan to increase their investments in China after both enter the WTO. Mainland Chinese investments in Taiwan on the other hand, are negligible as Taiwan strictly prohibits such investments. In 2000 Taiwan exports to the U.S. reached 34.8 billion and imports from the U.S. reached 25.1 billion making for a trade surplus for Taiwan of 9.1 billion. The U.S. served as Taiwan's largest market for exports and the second largest source of imported products.
Taiwan is out seventh largest market for U.S. products and its eighth largest trading partner. In regards to Taiwan's WTO accession and Taiwan's expectations for that, there appears to be a certain resolution amongst mainland officials that Taiwan will accede to the WTO in a short period after China itself becomes a member. As I understand it, the U.S. Government both under President Clinton as well as under President Bush has taken lengths to both inform the Chinese that the blocking of Taiwan's accession is not acceptable and to assure Taiwan that they will accede in a timely manner following Chinese accession.
Logically, it makes no sense for the Chinese to block Taiwan's accession. It would cause enormous problems for them in their relationship with the U.S. particularly as both sides work to place trade in a positive and central framework. Also Taiwan is a major investor in China and WTO accession will almost certainly start a new round of aggressive investing by many of Taiwan's companies. This sadly does not mean that we can be 100 percent sure that China will not attempt something in the eleventh hour. This is a relationship that is frequently difficult to understand and it is important to note that what may seem logical us frequently has no relevance in China.
It is, however, my belief that Taiwan will accede to the WTO within a brief period of time following the accession of China. In addition, Taiwan's accession to the WTO proffers enormous economic benefits for America. A fact that will help insure Taiwan's entry to the WTO, the U.S., Taiwan and China have been able to take a step forward in the WTO process by separating politics from economic objectives. Taiwan views WTO accession as an enormous opportunity. Direct, cross-strait trade should the barriers be unwound following accession will allow Taiwan to increase their exports while foregoing the expense of shipping through third parties as they do at the moment.
In addition, after widening profit margins by producing low end products in the mainland, Taiwan companies will be able to invest more in R and D and to focus on creating more patents and establishing rights to intellectual property where the true value lies. Trade liberization will enhance Taiwan's comparative advantages in local Chinese markets while promoting their ability to compete with other leading IT based economies in Asia and in the West.
Finally, WTO will provide Taiwan with a platform to resolve disputes bilaterally in an internationally recognized framework. The China WTO package could allow China to leap forward in its economic development, it would foster competition as an important impetus for restructuring state owned enterprises and could advance the expertise of its work force. On the other hand, China has to maintain political and regional stability while maintaining investor confidence as foreign direct investment has fed the continued growth of China's economy. As China has so much to gain from a productive membership in the WTO, I believe that they will sincerely try to live up to their obligations to their trading partners. However, I do believe that China will try to take as much advantage of that position as possible as do most members of the WTO including the United States, maneuvering to receive favorable terms and conditions.
Indeed the behavior of the Europeans over banana quotas and commercial airplane equipment subsidies is ample proof that that WTO is not immune to abuse. In regards to the actions of the United States if China fails to live up to its WTO obligations, the Council feels that the U.S. should not take any unilateral action if China fails to live up to its WTO obligations. All disagreements should be solved through the WTO dispute resolution process. It is the position of the council that a strengthening of the process is needed as we have a selective compliance record by some of our largest trading partners.
Finally, most of the Sino-American dialogue of late has focused on the military relationship between the United States, China and Taiwan. However, there are other important considerations beyond the military perspective. These economies are more closely linked today than ever before and while their inter-dependency is producing important economic gains, it is also further exposing the U.S. economy to the risks of conflict in the Taiwan Strait. American companies are increasingly relying on Taiwan companies to supply them with computer products and components. Already Taiwanese technology companies have achieved a great deal of success in providing those components. That's success has been driven by robust investments in China.
Taiwan has committed about 50 billion in funds to the PRC of which 25 billion was paid in capital. The impact of this investment is felt most profoundingly in the realm of information technology. Taiwan's push to become and even more player in the global IT market will be influenced by the entry of both Taiwan and China into the WTO. Direct trade relations with China providing a pool of skilled low cost labor will increase Taiwan's ability to cut production costs, thus increasing their ability to lower costs for their American buyers while offering access to the vast and rapidly growing IT market in China.
This is particularly significant today with the United States economy slowing and China's appetite for PC's and other technology products growing rapidly. As Taiwan's manufacturers seek a new base for low cost production, they're increasingly producing that technology components, the components the U.S. relies on for our domestic productivity gains in China. It is likely that American companies will become increasingly reliant on Taiwan as a source for the technology equipment U.S. businesses use daily. However, the extent to which the U.S. Government and the policy community is aware of this independency is really not clear.
The opening of cross-strait trade and the accession of Taiwan and China to the WTO will highlight this trend and further strengthen the economic inter-dependency between them and with the United States, but that will make the U.S. that much more reliant on an improvement in cross-strait relations for its own economic well-being as American technology products are increasingly produced in one of the world's most potentially danger areas. Thank you.

CO-CHAIRMAN MULLOY: Thank you, Mr. Hammond-Chambers.
Mr. Lewis, Commissioner Lewis.
COMMISSIONER LEWIS: Thank you very much for your really informative presentations. I'd like to ask each of you a question. Mr. Hammond-Chambers, as Taiwan begins to shift the production to China, what will happen to employment in Taiwan?
MR. HAMMOND-CHAMBERS: Unemployment is, in fact, rising in Taiwan at the moment. We've seen some unprecedented levels for Taiwan, I might add.
COMMISSIONER LEWIS: How high?
MR. HAMMOND-CHAMBERS: It's about 4.6 percent right now, according to the Ministry of Economic Affairs.
COMMISSIONER LEWIS: And what will happen as these --
MR. HAMMOND-CHAMBERS: Unemployment will almost certainly continue to rise until the government comes up with comprehensive policies to re-employ its people. That, in a short term, certainly does not look likely as domestic economic reform is in stalemate in a standoff between the President's office and the Executive Yuan and the KMT Legislative Yuan.
COMMISSIONER LEWIS: Okay, thank you.
Professor Cohen, I gather that you are and advocate of China joining the WTO?
PROFESSOR COHEN: Absolutely.
COMMISSIONER LEWIS: I'd like to ask you and the Wolmans and Kevin: you're also all concerned about what is happening to the American economy as a result of globalization. What can we do about this? I'd like to ask each of you that question.
PROFESSOR COHEN: Well I think --
COMMISSIONER LEWIS: What should the U.S. Government policy be? In an earlier Commission I asked somebody what should the U.S. foreign trade policy be and one of the people said we shouldn't have a foreign trade policy. What should our foreign trade policy be?
PROFESSOR COHEN: Well, I don't want to go too far beyond my last, but you've asked me. This morning we heard some suggestions, including retraining of our own workers to adjust to the needs of an international increasingly integrated world economy. Taiwan is going to have to do the same thing. I should point out there are about 300,000 Taiwanese working on the mainland now. So they're not looking for jobs. They have jobs to do. But we have to adjust to the realities of the world. I don't think we can --
COMMISSIONER LEWIS: Can we ever compete with Bangalore or Chinese wages?
PROFESSOR COHEN: We'll have to do what we are doing. We can do different things. We can't compete flat out in the same identical industry and the same wages. We have to always keep ahead of them. That's the meaning of high tech of course.
COMMISSIONER LEWIS: Thank you.
MR. WOLMAN: We basically failed to do that, may I say, since the real income of American workers, except for the window of the --
COMMISSIONER LEWIS: Right.
MR. WOLMAN: -- last couple of years, has been declining.
COMMISSIONER LEWIS: For 25 years.
MR. WOLMAN: It has not been rising --
COMMISSIONER LEWIS: Right.
MR. WOLMAN: -- since 1973 basically.
COMMISSIONER LEWIS: Right.
MR. WOLMAN: My own view of this is somewhat complex. I believe that we should allow China to join the WTO. There's just too much at stake in the world. I've never been to China. I've just seen too much good being done by opening up the world in other countries. Wonderful things have happened to very, very, many people. Wonderful things have also happened to many, many Americans, including thee and me -- and I guess most of the people in this room, including me. I've benefited, you know, because our business has prospered because of this. This is not a great year but on average it really has.
The problem is that there are groups of Americans, especially workers, who are bearing an undue part of the cost of the globalization. That is basically the point. They get some benefits, but they sort of have to pay a lot of the costs. Some of the rest of us get huge benefits and don't have to pay much of the cost.
The implication of this is, to me, very, very simple. We simply have to do things to, in a sense, give them a much fairer shake than they've gotten up to this point.
In this respect, for example, the last tax bill is bizarre; because fundamentally it does reward those who have gotten most of the benefits of globalization. It's payroll taxes, for goodness sakes, that should have been cut, not income taxes and particularly not in the top brackets.
The second thing is my own instinct is that the education efforts of this country are something of a joke still at this point. I mean, the love of learning has been expressed by no one in Washington as the guide to good education just in general terms. Okay? It's got to do with something else. Goodness knows what. But the fact of the matter is that the expenditures in this area should really rise as compared to other expenditures. There's simply no doubt about that.
One of the great things that has got the world to move since the end of the Cold War is our military spending has been reduced. We should fight a war on the lack of education on a much larger and major scale. Not doing so is totally irresponsible, particularly for those who are bearing the costs of globalization and sort of subsidizing the rest of us as a consequence.
So, this retraining -- I don't know what retraining means. This training is a very, very serious matter.
Finally, in this circumstance, and because I do think these forces will continue to work to hurt American workers, I really believe, for example, that their health needs and stuff like that ought to be met more thoroughly. I can't oppose globalization. I don't want to screw a particular group of Americans because of it however, as we've screwed them since 1973.
COMMISSIONER LEWIS: Thank you. Thank you. Kevin?
MR. KEARNS: Well, I think I differ with both the speakers on this. What can we do in our trade policy? It seems to me that we have to run our economy for the benefit of Americans, not for the benefit of other global groups. George Bush's statement a couple of weeks ago that there's a moral imperative for free trade to provide good jobs for others by, in George Bush's case or Bill Clinton's case, trading the jobs of the Americans. So step number one is withdrawing from the WTO.
The GATT system was fine where we had a veto over things. We're the Big Kahuna. We have the world’s largest market. We believe in bilateral relationships and agreements where we can engage in unilateralism, where we can enforce our trade laws when we see situations that are unfair, dumping, subsidies, et cetera, I think that's the way to go. We're Americans. What can we control? We can't control what the Chinese do with their legal system, what they choose to enforce, what they choose to neglect. Let's concentrate on what we, as Americans, can control with our political process.
Retraining is a joke. I'm sorry. 60 to 70 percent of the cost of a manufactured good is in labor. If you have an excess of labor, as China does, and lax or no environmental, labor, other types of regulations.
COMMISSIONER LEWIS: Safety.
MR. KEARNS: We you will never compete -- you don't shift into different areas, you don't retrain people for different areas. We will never compete, period. That's the end of the story. We can get all our cars, all our clothes, all our high tech, all our steel, et cetera, overseas. So we have to run -- yes, we have to do things differently. We have to go back to the old system and run the American economy so that cartelized economies in Europe and Japan and Korea and these very low wage economies elsewhere in the world don't take all our jobs, hollow out our industry.
You know, the best training program is to put a man or woman together with a machine. That increases their productivity tremendously, it increases their wages. And if they're not fighting against Chinese or others armed with American capital and American technology, we'll do quite well. We did quite well in American system here for, 200 years.
COMMISSIONER LEWIS: Kevin, thank you. Ms. Colamosca, do you want to add anything?
MS. COLAMOSCA: No, I just wanted to repeat that I think that both political parties over the last 20 years have really under-played the loss of manufacturing jobs. And I found it to be particularly disappointing in the 1990's. It was a story that should have been covered much more than it was. Nobody had any solution to it and I just think that as the white-collar jobs start to disappear and they will, that they have to be covered by the press and by the Administrations in power. I mean, much -- they can't be ignored the way the loss of blue-collar jobs have been ignored.
COMMISSIONER LEWIS: Thank you very much. Thank you. Co-Chairman Mulloy.
COMMISSIONER DREYER: A question for --
CO-CHAIRMAN MULLOY: Can you pull that microphone over, please?
COMMISSIONER DREYER: Yes, thanks. A question for Professor Cohen. You know, we all see a different part of China, I think. It's the old cliché about the blind man feeling the elephant. The China I see is the China you've described in many ways. It's a weak state and in some ways it seems to be getting weaker. You mentioned that they could stop local protectionism if they really wanted to and I wonder if that's really true.
I mean, I know that they have the ability to stop local protectionism in Village X or County Y, but I don't think they have the -- at least, well, from what I see, they don't have the resources to stop it everywhere. It's the old Chinese saying that heaven is high and the emperor is far away. And the Qing actually wasn't all that good at stopping it either. You know, I think you may have just slightly exaggerated the degree there. The only one --
PROF. COHEN: I didn't talk about their success. I said, they had these rules that recognized the problem.
COMMISSIONER DREYER: And which often didn't work since they didn't get down below the county level. And so there's plenty of local protectionism it has a long history in China and as governments get weaker, their ability to enforce the laws they have gets weaker still and I wonder if you wouldn't apply that to the legal system you've described in terms of WTO.
PROF. COHEN: I think it's a question of priorities. First of all, China's financial intake at the central level is insufficient. They do not get enough share of the taxes they collect and they have a poor inefficient, often corrupt system of tax collection. So the central government is starved for funds.
With the funds they have, they have to have a sharp set of priorities. They give too low a priority to these questions of structural reform except when you get a security case involving so-called spies or religious elements, whatever because they think that goes to their own ability to hang onto power.
I think that I say in the paper, the Zhu Rhongji, a brilliant, dynamic executive, himself although he talks the talk of law reform and the importance of fulfilling contracts, doesn't really give it the same priority by any means as state owned enterprise reform, banking reform, tax reform, securities regulation reform, but he doesn't see there's a connection. They'll never fully succeed in these reforms if they don't have a credible legal system. They'll never attract sufficient financial investors to meet their huge needs if they don't have a credible system.
People call me up every day and they say, "Can you tell me about the enforceability of contracts in China, can I get security and property in China, can we rely on enforcement"? When I tell them what the facts are, they say, "Maybe we'll wait a little longer". So it's a question of priorities and obviously, behind all this insecurity of the leadership that's leading to these espionage cases, et cetera, is a sense of loss of control.
The Communist leadership in China sees it's losing control gradually. That's really -- I share your perception of that and they're fighting a rear guard action trying to hold out but their power is shrinking. And the only way I think they're going to pull it all together is to reform their political system and they have to include the courts in that reform.
COMMISSIONER DREYER: A quick question for Mr. Rupert Hammond-Chambers; I just came back from Taiwan 10 days ago and I found a great deal of concern there, from Tsai Yin-wen and others, about what computer manufacturing on the mainland by Taiwan firms is doing, and tremendous concern that this is undermining not just their, Taiwan’s, security, but our security as well. I suppose there could be a cutoff of computers. And would you address that question, please?
MR. HAMMOND-CHAMBERS: It's a big question. The Taiwanese use the term "hollowing out", increasingly, particularly for the southern parts of Taiwan where we'd seen some of that traditional manufacturing be based and now we're seeing it predominantly in Fujian province directly across the Taiwan strait.
Taiwan's optimists believe that this is a natural progression and that Taiwan should take the next step just as the United States did in it evolution as a technology based economy and focus more on the owning of its own intellectual property as opposed to manufacturing somebody else's, given that the real value is in the ownership of that IP.
However, it does not address the issue of a growing number of Taiwan's workers who are not employed as a consequence. If you do travel to the south of Taiwan, you're led to believe that the actual figure of 4.6 in and of itself is not accurate, as you need only see the myriad of noodle vendors to know that possibly unemployment is far higher. These men and women just aren't counted on the rolls. From the council's standpoint and our relationships with U.S. technology companies, they are themselves innovating in attempting to take into consideration this evolution in the production of these products, particularly as we move into a post-PC environment. You're seeing now companies like Microsoft, Palm, IBM with Linox, moving in and really starting to work with the Taiwan companies on the next generation of products.
And I fully expect Taiwan's position in the IT technology supply chain not to decrease but, in fact, to increase for they have positioned themselves better than anybody to be the base or the main cog, if you will, the central cog, in the IT supply chain. Where these products are produced is incidental. They will still be produced for the most part, by Taiwan companies. They will just be produced in China.
From America's standpoint, as I touched on in my formal remarks, I do happen to believe that we need to spend some more time thinking about how that exposes us and our economy. If we look at the two scenarios for a PRC attack on Taiwan, you've got the highly unlikely invasion and the far more likely blockade scenario.
Well, a blockade would in essence end the movement of most of these technology products almost overnight just, indeed, as the awful earthquake that struck Taiwan almost two years ago did. And if you read some of the quarterly results of some of our pre-eminent technology brands like Compaq or Dell, in the formal announcement going with those results, their chief executives cited the earthquake and the brief end to the supply chain of technology products like chips, as a reason that they had a slight blip at a period of actually extraordinary growth for these companies. It hurt them a little bit.
And I think that is a small indication of the problems that we would face if something more serious were to take place in the Taiwan strait.
COMMISSIONER DREYER: Thank you.
CO-CHAIRMAN MULLOY: Thank you. Commissioner Reinsch?
COMMISSIONER REINSCH: Thank you, Mr. Chairman. I had an absolutely brilliant question for Mr. Wolman, but Ken Lewis already asked it, so I'll move on to something else and perhaps save a little time.
COMMISSIONER LEWIS: It was a brilliant question.
COMMISSIONER REINSCH: It was.
COMMISSIONER LEWIS: Which one was it?
COMMISSIONER REINSCH: It was also a thoughtful answer on globalization, and I was interested in it.
I want to ask a couple questions, if I may, to dig a little deeper and cover your points. I think at one point you were talking about how American investment in China has crowded out investment elsewhere in Asia, and it seems to me that from the point of view you're articulating, you really are probably more concerned about not more U.S. investment elsewhere in Asia but U.S. investment outside the United States.
I mean, isn't it your view that we'd rather have that investment here than there?
MR. KEARNS: Sure, I think I said that in my remarks. I mean, to the extent that we can arrange a system where the investment goes here and you get the volumetric effects of the investment in our own economy, that's fine. If it has to go somewhere overseas, I'd prefer it go over the right seas, so to speak, that it go to friends and allies as opposed to hostile powers.
COMMISSIONER REINSCH: Well, let's talk about here for a minute and not there. How do we keep it here? Do you want to just let companies invest abroad?
MR. KEARNS: Well, of course, it's a complex question but, you know, if you look at the genesis of why all this investment started to go overseas and continues to go overseas, part of it is the fact that Communism as a system fell apart so you have the Soviet Union, former Soviet Union and you have China as it shifted at least part of its economy to a capitalist or state-directed capitalist system, putting all these workers at the disposal of western corporations, in other words, political barriers for many years prevented those things from happening.
You have a country like India or Indonesia opening up to a certain extent to market economics. So certain factors are beyond our control in that sense.
COMMISSIONER REINSCH: Well, wait a minute, though. You were talking earlier that what we ought to be doing is managing the economy for us.
MR. KEARNS: Yes, yes.
COMMISSIONER REINSCH: There are things that are under our control.
MR. KEARNS: Yes, sure.
COMMISSIONER REINSCH: And to me, one of the things we ought to be able to control is what American companies do with their money. Now, are you suggesting that we do that?
MR. KEARNS: Well, I'm trying to lay down the historical track of how we got to where we are today.
COMMISSIONER REINSCH: Well, sure. I mean, there's a lot of reasons why they've done what they've done. The question is, at this point do you think we should try to change that.
MR. KEARNS: Yes, I think we should, absolutely. I think that Japan, China, Europe, all these economies, various countries, trade blocks that are not open to U.S. exports. We long ago should have engaged simply in reciprocal trade relations -- if they didn't open up adequately to American goods, that is a direct export of manufactured goods there, we should reciprocate and not let their goods in. I think that the trade deficit with Japan is as much of a disgrace as the trade deficit with China.
The Chinese trade deficit is more troubling simply because of the security implications.
COMMISSIONER REINSCH: You're slipping away from me here. I'm not talking about trade. I'm talking about investment.
MR. KEARNS: Bill, I'd like you to follow what I'm saying. What I'm saying is that a reciprocity-based trade policy, simply will prevent American investment from going overseas. If those countries are shut down through various actions that America takes, because they're unfair. I mean, the reason to go overseas is we can't get our goods in there. So let's take Boeing for example.
Boeing has a strategy. Phil Condit (phonetic) says they're going to be, if they're not now, an international company, a company of the world, that type of thing, manufacturing all over the world. They have a philosophy that giving Japan, China and Korea part of their manufacturing, in other words, making investment over there, is going to help sell aircraft -- but it doesn't work that way apparently. So they come to the Ex-Im bank for $3.3 billion worth of subsidies last year.
I don't know why they didn't go to the UN or some other international agency. I don't know why since they're an international company they come to the U.S. taxpayer. So I think it's a complicated answer but the simple answer is, yes, we can control it and we ought to.
COMMISSIONER REINSCH: Okay, well, I think that we're probably not in agreement about that but --
MR. KEARNS: No, I'm sure we're not.
COMMISSIONER REINSCH: But let me move on because time is limited. I'd also, just as an aside, dispute your comment about the Export/Import Bank being a subsidy. I've been working on that one for 20 years. Apparently, thanks to this Administration, we have to fight it again, but -- let me just ask you one more quickly that I'm just curious about.
I can't help being sort of in the weeds for the moment, but I am struck by your comment about the satellite amendment. That happens to be one of the few subjects that I have some background in. I assume that in view of what you've said that you were probably happy with the action of Congress two years ago that addressed that problem.
MR. KEARNS: Well, again, it's a complicated problem and we've done the wrong thing in the past and the horse is out of the barn.
COMMISSIONER REINSCH: So do you think that Congress fixed it or not?
MR. KEARNS: Well, they're trying to fix it again this year, aren't they? No, I don't think it's fixed.
COMMISSIONER REINSCH: They're trying to put it back the way it was before then changed it. I mean, the consequence of the action that Congress took in 1998 was to reduce the domestic satellite industry's world market share from 75 percent to 45 percent which I think was probably not good for American jobs among other things and also for American technological leadership, but it seems to me that was in line with what you were advocating.
MR. KEARNS: Well, you know, you're again trying to isolate on one point. If we had a sensible program for a launch industry in this country, we wouldn't have the satellite problem that we did and that goes back --
COMMISSIONER REINSCH: I agree with that entirely.
MR. KEARNS: You know, that goes back to the Challenger disaster, et cetera.
COMMISSIONER REINSCH: No question about that, but here we are. We have to deal with the --
MR. KEARNS: Yes, we can undo certain things and we can still have a more effective launch industry. Boeing, of course, as you know, has been trying to do something along those lines with the offshore platforms. I mean I don't advocate -- there are no quick fix answers, but there are complex policies that can be put into place by reasonably knowledgeable people in the American Government and private industry as opposed to looking for the fix by always investing overseas.
COMMISSIONER REINSCH: Thank you.
CO-CHAIRMAN MULLOY: Commissioner Bryen?
COMMISSIONER BRYEN: Thank you, Mr. Chairman. This question is for Mr. Hammond-Chambers first but I think Mr. Kearns may like to comment and others may comment. In the case of Taiwan and their investment in China, you were talking with Commissioner Dreyer about some of the impacts on the computer industry.
I'm more interested in the impact on Taiwan itself and whether they've put themselves in a precarious position, vis-a-vis, China in terms of their freedom of action in the future, whether they've created potentially inside of Taiwan a Fifth Column that weakens their ability to have a flexible policy and aside from my concern about Taiwan, given the level of investment of the United States, is that just -- are we seeing in the Taiwan case a pre-cursor of what we might see in the U.S. case. That's my question.
MR. HAMMOND-CHAMBERS: Certainly Taiwan has increased its vulnerability through the aggressive investment that we saw through the 1990's in China. There's no denying that. However, it is noteworthy that China, for the most part, almost exclusively has shied away from using Taiwan's investment in the mainland as a political tool to force concessions out of Taipei.
Now, there were some slightly alarming statements post the election of Chen Shui-bian and this committee of advisors that was put together to help Chen beef up his credentials prior to his election.
And we had some PRC officials stepping up and questioning their loyalty, if you will, to the concept of unification. But really, that didn't amount to anything at all and for practical purposes, Beijing has an open arms policy towards Taiwanese investment in the mainland.
To the extent that WTO accession, and we hope the breakdown of the barriers to cross-strait trade increase that investment, there is always the chance that Beijing may be feel it's forced into a corner and look at this as a solution.
COMMISSIONER BRYEN: You're getting away from what I was --
MR. HAMMOND-CHAMBERS: I'm sorry.
COMMISSIONER BRYEN: I mean, look there's over 200,000, someone gave a number, 250, 260,000 Taiwanese working in China.
MR. WOLMAN: At least.
COMMISSIONER BRYEN: At least, probably a lot more, who are essentially hostages, if the Chinese government wants to treat them that way. There's nothing the Taiwanese can do about it. It's a very politically risky situation, don't you think? I mean, I wonder, we have one or two American citizens put in jail by the Chinese arbitrarily which caused great concern here. Look at the potential for trouble that's there. That's what I was --
MR. HAMMOND-CHAMBERS: Oh, okay, then, in that respect, you know, that's the high wire that Taiwan walks in so many of the htmects to its relationship with China, whether it's its investment policy or the fact that it has a myriad of executives working in the companies that have now based themselves in Taiwan, or whether it's an actual -- you know, whether it's some sort of conflict situation arises between Taiwan and China, I --
COMMISSIONER BRYEN: I'm glad you said that because it's a very risky profile and therefore, adds to overall insecurity rather than to security. The argument's been made a lot today that all this trade stuff is adding to security but, I think there's the other side to the coin.
MR. HAMMOND-CHAMBERS: There is the other side, but I happen to believe that actually it's good for them.
COMMISSIONER BRYEN: Well, it depends if you were one of those 260,000 Taiwanese, you may have a different -- Mr. Kearns, did you have something to say about that?
MR. KEARNS: Well, I am increasingly disturbed by the high tech investments from Taiwan in the computer area, in semi-conductor lithography equipment, et cetera, going from plants in Taiwan or businesses in Taiwan to China and I think that that can -- by giving the Chinese -- and they're not necessarily just Taiwanese companies, ASML, for instance, of the Netherlands giving the Chinese .25 micron lithography machines and helping them step them down through phase masks. From a strictly security point of view, not just an economic point of view, there's a lot going on that I think enhances military capabilities and developments in China.
COMMISSIONER BRYEN: Do we have time for a follow-up?
CO-CHAIRMAN MULLOY: Steve, if we get finished, we'll come back and we'll do another round that might be the better way.
COMMISSIONER BRYEN: Okay.
CO-CHAIRMAN MULLOY: Ambassador Lilley?
CO-CHAIRMAN LILLEY: My questions follow right on Steve Bryen's and others. The first thing, Rupert, do you realize that you're going to cause a great unemployment problem in the United States if some of the things you've said actually transpire? You just put the China watchers out of business. These hand-wringers that say, "War is going to start in the Taiwan strait, the issue is deployment of missiles and missile defense and sovereignty, unity, independence and China is going to go to war". I heard this all day yesterday from some of the most eminent China watchers.
It was right out of Alice in Wonderland. And you said, there are linkages, there's a inter-dependence. Steve raises the 300,000 Chinese -- Taiwanese in China as hostages. I think it could be a Trojan horse. I think the Chinese have got a tiger by the tail in this one. The Taiwanese have their own churches, their own associations, their own schools and some Chinese are even saying, "How about a special political zone in Dong Guan". A process is taking place and if people worry about Taiwan, they must also know China is dependent on Taiwan inputs to keep its growth rates up and thus to keep stability in China.
If they cut that off, they've got big problems and I think it's an inter-dependence, which plays in our favor. It links the supply chain. Some of our so-called China watchers that stress war and spend their time looking at it, call it the dirty little secret.
That is the United States dependence on Taiwan in the time when the earthquake happened. What happened is we've suddenly figured out as you've figured out a long time ago, the dependence of Taiwan on Chinese manufacturing, and one of the leading Taiwan manufacturers, the best in the business on chips. Last year he wouldn't touch China. This year he's over there saying it's economic imperative to go in.
And he's went there right with the former premier Vincent Shao and Shao talked about common market. These are positive trends, which are ignored here to a large extent in the intelligence and in the State Department. It's very complex and we do not know of the contents such as the conversations between Chang Jung Fa and Chen Shui-bien, which can affect the whole balance between the two sides of the strait.
But having said that, do you think that the people in Taiwan have a real strategy of any kind in marshalling their impact on China? I mean, when I asked them about the impact of their groups in China they often draw a blank. Are you getting the impact that the Chinese are receiving from Taiwan the way -- Hong Kong for instance has changed the environment in the Pearl River Delta, and that Taiwan's investment is now going up towards Shanghai. There's about 70,000 Taiwanese that are buying up the villas in Shanghai and there's something happening there that has a dynamism. Our time here is spent on missiles as you have said.
We miss the point and that's one thing that strikes me. Jerry, you know, I had this experience with Ren Jianxing, do you remember that old guy, I think we called him the wall man in China. He would never admit that China's courts were linked to the party. He said we have an independent judiciary.
PROF. COHEN: He was the head of the party political legal group as you know.
CO-CHAIRMAN LILLEY: He stood there and looked me right in the face. I had the documents. I put them in front of him. He wouldn't change.
PROF. COHEN: That's great. Well, that's why they fired him.
CO-CHAIRMAN LILLEY: Ren said he was independent. Now when you deal with that kind of double think and when you are trying to influence their legal system and then they try to get away with that double-talk they've in fact done it for years, it's almost Orwellian. You could try to crack that I suppose. One of the best programs I've heard about is the Temple Law School Program, transferring the whole law school in China. And I think Yale law students started something fairly --
PROF. COHEN: NYU and Temple are now cooperating in that.
CO-CHAIRMAN LILLEY: Are they? But that is a whole law school in China giving Americans LLB's.
PROF. COHEN: That's right. LLM's, masters of law, yeah.
CO-CHAIRMAN LILLEY: But that's a real step forward.
PROF. COHEN: Absolutely.
CO-CHAIRMAN LILLEY: Without government money?
PROF. COHEN: No government money yet. We're hoping to have some, some day.
CO-CHAIRMAN LILLEY: But that would seem to me to be the area where you could make a lot of progress.
PROF. COHEN: You know, if you link law reform to economic development especially foreign investment, Chinese leadership will go a long way in working with you, as long as you don't use the phrase "human rights", even though they know law reform is obviously going to enhance the likelihood of human rights getting enforced. You've got to link it to the magic words and they've gone a long way.
The other day, one of the major courts in China came to see me and said, "Can we cooperate with your law school on the improvement of our court trials in criminal matters"? I almost fell over. Now, there are a lot of people of goodwill, more and more younger people, better trained, coming into the system. I admire the courage of many of the lawyers in the big cities of China. I've been dealing in criminal cases lately as I've said and I've met a whole new cadre of Chinese lawyers who weren't known outside of China because they don't speak English.
But these are gutsy, able lawyers who are trying to fulfill the traditional lawyer's role at great risk to themselves. Lawyers are getting locked up in the provinces in China if the prosecutors think they're too vigorous in their defense. They're are lots of people here that we could be cooperating with and giving more than moral support to. And I think we've got to look at that.
Now, we've been talking about risks. There are all kinds of risks in everything you do. Doing nothing has its risks. I think you're right, the likelihood of the PRC trying to use 300,000 Taiwanese as hostages upsetting the whole PRC economic development program, is very, very limited. We have hundreds of thousands of Americans in China, too. The greater likelihood is what's taking place on the ground.
And there's one other point, I think we should keep in mind. So far we keep bilateralizing this discussion. It's not like we can control things in China by refusing to cooperate with China by not letting them in the WTO or getting us out of WTO. There's something called Europe and Japan. They're going to go on with this process. We can't stop it. The only question is, are we going to ride the horse, benefit from it and manage it as well as we can.
And finally, I want to associate myself with Mr. Wolman's remarks about our government should be paying for the cost of the painful readjustments the minority of our population has to suffer as a result of the greater economic benefit that comes from our integration with the world.
CO-CHAIRMAN LILLEY: Rupert, there's one other thing that Senator Sarbanes raised this morning, you weren't here but he said, one of the big problems we have in China is our investment is getting way ahead of our trade. We've got this terrible imbalance which is all wrong and the investment in China goes to produce products for the United States exported from China whereas our trade exports to China keep shrinking.
Taiwan has a huge trade surplus with China, gigantic investments.
PARTICIPANT: How do they do it?
CO-CHAIRMAN LILLEY: Well, I know how they do it.
MR. HAMMOND-CHAMBERS: They prohibit most of the goods and services that China produces from being imported, so they export but they don't allow imports from China. That's how they do it.
CO-CHAIRMAN LILLEY: There's also very shrewd businessmen in Taiwan that go into China and they looked at me and they say, "We don't know how you Americans do business in China". It's money under the table. It's keeping your investment at a certain level. It's getting to provincial officials. It's using our geography, using all of these advantages we have and we can lay terms on the Chinese, A, 75-year lease, B, hire and fire, C, no party in the organization, D, they go right down the list and the Chinese say, "Yes, yes, yes, yes, yes", and there's a little exchange that goes on there that gets this thing done and the places absolutely proliferate all over China, because it's a hell of a good business.
MR. HAMMOND-CHAMBERS: If you go -- sorry.
CO-CHAIRMAN LILLEY: Yeah, so I'm just saying Taiwan has a real formula for getting a lot out of China. They've outsmarted the Chinese at their own business in some ways, whereas the game goes back and forth.
MR. HAMMOND-CHAMBERS: Just quickly a couple of things, to go back, you actually labeled a quick question about what sort of impact Taiwan felt it was having on China. I actually subscribe to your sort of Trojan horse theory that all of a sudden, there's going to be a sort of crack and Taiwan's going to come out in China and all of a sudden, China will become Taiwan and not visa versa.
If you visit with America's technology companies in Taiwan, if you go and see the heads of these businesses where they have -- where most of them, if you think about Intel or Motorola, for example, you have a terrific amount of devolved power into these offices to manage their regional relationships and they're responsible for the management of these Taiwan company accounts.
Now, these companies have now straddled the strait. They're in Taiwan and they're in the mainland and this is presented over the past couple of years particularly a problem for some of our pre-eminent technology brands because they're models for servicing their clients weren't designed to function both in Taiwan and in China. So what you're seeing now is far more regional cooperation between these offices.
Intel is a very good example because I happened to be with those guys just on my last trip to Taiwan this spring and listening to them talk about their meetings that they're holding in Taipei, in Singapore, in Shanghai where they're talking about this trend and the need for U.S. companies to continue to look for ways to better service the Taiwan companies that they have relationships with, not just from the htmect of servicing the interests of those clients but increasingly because Taiwan companies have demonstrated an ability to be successful on the mainland and because traditionally our companies have had so many problems. They're recognizing the benefits there of going into China together and that's a very real trend.
CO-CHAIRMAN MULLOY: Good. Thank you. Commissioner Wessel.
COMMISSIONER WESSEL: Thank you. I'd like to go back to the -- which, of course, underlies all our questions, the question of security and the question of manufacturing that several of us are very concerned about the hollowing out, as you use the term, in Taiwan, the hollowing out of manufacturing here.
How concerned should we be about what has happened to the manufacturing base in this country as we look at our overall security interests? Anyone who wants to respond.
MR. KEARNS: Well, something that seems to be missing from today's discussion is the overall American trade deficit and according to neoclassical free trade theory, there has to be some major adjustment coming up soon. We can't continue to run trade deficits at this level and inspire world confidence in our economy -- which means people are going to unload these dollars that they're holding now and interest rates will have to go way up and it will plunge us into a very deep recession or depression.
So all the various htmects of China aside, whether it's the legal system or the military, potential military threat, et cetera, the overall trade deficit with China, with Japan, with rest of East Asia, with Europe -- China has to be seen in the framework of this, the worst offender, as it were, in terms of the trade deficit, but certainly part of this picture.
The dollars that people earn through the trade deficit, through their surpluses with the U.S. come back to the U.S. They buy high technology companies, well, they buy all sorts of companies but under the CFIUS process we've seen 1300 high-tech companies in the last 12 years bought by foreigners, defense-related companies.
If we don't have the technologies here, if we don't have the money to invest in high technology, if we don't have the manufacturing processes, that's what modern weaponry is all about. It's about computing and optics and lasers. The next war, if it comes, is going to be fought on the basis of technologies like these. To the extent that our manufacturing is hollowed out and our high tech is hollowed out, we are not going to be as effective in that war as we were, say in the Persian Gulf War.
The Europeans realize this. Certainly the Persian Gulf War gave China -- set off alarm bells there and has led to their -- it's one factor in their defense modernization. So I would be very concerned that the overall trade deficit, specifically that the China portion of it, but the overall thing, is hollowing out our manufacturing, our ability to defend ourselves.
MR. WOLMAN: I'd like to play another kind of a little game if I might. Fundamentally, you know, the amounts of payments works in two ways; either the trade account adjusts to the capital account or the capital account adjusts to the trade account. I mean, apparently, you know, there's a bit capital inflow in the United States so the trade account may simply be adjusting to that. And everybody, you know, says this is a wonderful thing because, you know, for whatever reason, people love to invest their money in the United States, which I do not dispute.
I'm not too dumb about why they love to invest their money in the United States and the reason for that is, is that profits in the American economy have been very strong for a long time now. The profits are growing, you know, in case you don't know, in nominal terms about twice as fast as GDP over the past 15 years or so. It's a big number and the proportion of profits in total American -- in national income has risen, you know to virtually unprecedented levels, which one can ask questions about whether they will be sustained or not.
Now, just for fun take another case. If what we're really seeing is massive portfolio investment by the rest of the world in Wall Street, imagine the following scenario. Unless something terrible happened to the stock market today, the price earnings ratio on the S and P 500 had the moment is 27, okay, on trailing earnings. That's a very big number, folks. The post-World War II average is something more like 15, PE is 15 and, you know, Jeremy Seigel's 200-year average is more like 11 or 12 or something like that, okay.
So the American market is still very, very highly valued. There's no question about that. Now, suppose the rate of profits starts to decelerate, which I guarantee you that it will because we're now -- we had this little lead for awhile but the fact of the matter is that competition tends to erode profits, particularly in the high tech sector and that's what we're really seen.
Now, suppose for fun that the American market goes down, I mean, to say 15 or 16, I'm just giving you a scenario in which you're going to get your thing, okay. Under those circumstances, of course, you will not see this flow of capital in the United States, you know. So then the trade account is going to have to adjust to the balance of payments. The capital account is going to have to adjust to the trade account and we could get into a real mess and that's the end of my story.
I take this very cynical -- I mean, I work for Business Week. I love business, I love profits, but I just think things have gotten out of line to a very considerable degree here and I think, really, that we're going to get a very large -- I mean, this hasn't been already positioned, folks. We're going to get a very sharp readjustment on the stock market and that's what's going to trigger the problem with the American balance of payments.
So, I'm not very -- if you want to be complacent about the future, be my guest. If you don't want to be complacent, be my colleague.
COMMISSIONER WESSEL: Let me ask another question. Thank you for that. Let me ask another question. I wish you had been available during our trade deficit hearing.
MR. WOLMAN: I'm sorry, I was ill at the time.
COMMISSIONER WESSEL: No, no, we appreciate that because we had wanted you to participate. The steel industry is currently undergoing a crisis and perhaps deeper -- not perhaps but deeper than it had during the 1980's. At that time the steel industry paid roughly $100 million in legal fees to bring their cases. As a representative of smaller sized businesses, predominantly, how do you view access to the trade laws? If we're all talking about the need to monitor and enforce the WTO agreement, if China accedes, can your clients, can your member companies afford to do that?
MR. KEARNS: Well, we have been to USTR on two occasions with member companies and because they're small businesses, small manufacturers, in terms of getting into the Chinese market, USTR won't even look at us. You know, they just don't have the resources.
To be absolutely fair, if you want to try to open the Chinese market, the amount of market opening that will be done for these two small companies getting into China, vis-a-vis, maybe some other larger problems, is a smaller benefit to the U.S. economy. So the U.S. Government does not, in my opinion, dedicate the resources it needs to, to market opening and it certainly doesn't dedicate the resources it needs to compliance.
I don't know if Harry Wu has appeared here or will appear here but you know, he can tell you an American businessman goes over, thinks he's dealing with a Chinese businessman and then the subcontract goes from the Chinese businessman to the prison labor factory, for instance, and there's no way that two or three Customs visits a year to China in a country that vast are going to, turn up these things.
So, yes, it is a question of money and resources and they're absolutely inadequate, which is why I want to try to focus on what we can control here as opposed to trying to change behavior in Japan or China.
COMMISSIONER WESSEL: But just as a priority as we -- or a creature of Congress, if I remember NFIB and other small business organizations have told members of Congress and their staff that 80 percent of the new jobs created are in small businesses. So if employment, wealth creation portion of economic security is important, then our priority should also be helping clients of your organization and others who need the resources, who need the help.
Boeing can afford to be able to press its case forward. Your companies are the ones who need help.
MR. KEARNS: Yes, I won't dispute that. NFIB, of course, is mainly service businesses, it's not manufacturing. And I think the emphasis has to be on manufacturing. Again, you put a man or woman together with a machine, they can command higher wages than stocking a shelf at WalMart.
COMMISSIONER WESSEL: Thank you.
CO-CHAIRMAN MULLOY: If I can add just one thing to that discussion, the Commerce Department is trying to build a good -- USTR is too small of an agency to really do compliance. They've got 175 people over there and are negotiating. You need compliance and they're trying to build a unit in the Commerce Department which I headed for a couple of years and we got some additional resources precisely to take on those types of cases that you're talking about Kevin.
Now, I don't know how effective they'll be but I do think that's where we really need to press because USTR is not going to be an adequate mechanism to do the compliance work in my view.
MR. KEARNS: No, I agree with that.
CO-CHAIRMAN MULLOY: Commissioner Robinson.
COMMISSIONER ROBINSON: Rupert, we're delighted you're here today.
MR. HAMMOND-CHAMBERS: Thank you, Roger.
COMMISSIONER ROBINSON: I think it was a very interesting exchange we've had on your portfolio more generally and, of course, Jim Lilley has a view on this as does Commissioner Bryen and others that make for a very animated debate and I think it's going to be an important element of our work to flesh this out, particularly the issue of who has the leverage here. Is it indeed Taiwan that is perhaps becoming over-exposed from an investment potentially debt which is going to get to the root of my question and other accounts, or in fact, do we have the tail wagging the dog.
Are they actually a good deal more clever than we might imagine and in fact, insinuating themselves into Chinese society and political life to a greater extent, et cetera? In that connection of just trying to basically flesh out some of the statistical side of this, you may not have it available and I'm not trying to put you on the spot. I'm the last one that would, but I was wondering if we might be able to acquire a sense of Taiwan's total credit exposure to the mainland both in public and private sector debt. I can't imagine that even you have that off the cuff, but it would be something that if it is around, would be useful, I think, to us.
And similarly, the idea of if many Chinese imports are, indeed, restricted, is it also true that China is not able to float equity and debt offerings in the Taiwan securities markets? Is that likewise restricted?
MR. HAMMOND-CHAMBERS: It is but just to go back to your first point, I don't have those figures off the top of my head. However, I would be very happy to generate some statistics for this Commission if you would wish and submit those in a timely manner.
COMMISSIONER ROBINSON: That would be very helpful because, if we do have, God forbid, something take place in the Taiwan Strait or whatever, it is going to be important to understand what the equities -- what the balances are, so to speak literally and figuratively. But as I say, your testimony has been of great value.
MR. HAMMOND-CHAMBERS: Thank you very much.
COMMISSIONER ROBINSON: As far as the next hearing of the Commission is concerned, and I certainly don't mean to jump ahead but we are going to be looking at Chinese fundraising in the U.S. capital markets on July 6th for those interested and that will likewise be a public hearing.
But I did want to ask Kevin Kearns while we have him here, about his view and I'd be interested in the views of others on the panel, Mr. Wolman and certainly, Mr. Cohen, if -- but Kevin, your view on the rapid escalation of Chinese fundraising in the U.S. capital markets via principally the offering of securities by Chinese state owned enterprises. Do you have a view on that?
MR. KEARNS: Well, we do in the written testimony we've submitted. We clearly oppose this. We believe that no Chinese state-owned company or even if it's partially owned, any company with Chinese Government involvement should be allowed to raise capital, period. All the issues of accountability and transparency, normal accounting practices, et cetera, all go by the boards and you don't get any transparency. So the point is that investors cannot make rational decisions in the vast majority if not all of these cases.
And the second thing that worries me just in terms of capital flows is that Chinese ability to raise money. I remember at one point last year we talked and there was -- China had a backlog of 200 IPO's that they were about to bring or willing to bring or ready to bring to U.S. capital markets, and I know we did a quick calculation. The amount of money was several times the trade deficit, hundreds of billions of dollars that would be involved in capital going to China.
Capital is fungible gets transferred there perhaps into Chinese military. It's a question of how much military involvement there is in these various companies, et cetera. So I think it's very problematic and I think it's something that this Administration needs to look at and we all need to look at much more closely. The large pension funds, potential holders of these IPO's need a new set of principles, whether it's Chinese or companies that invest in oil in the Sudan -- which Chinese companies are involved in but Canadians and others are involved in.
COMMISSIONER ROBINSON: But benign civilian, to the extent that they have them, private sector firms, would be another matter?
MR. KEARNS: Well, if it's completely private, which is somewhat unusual, and if they can satisfy western accounting standards and things aren't papered over by Goldman Sachs the way they were in the Petrochina IPO, I'm willing to consider it, but I see very little of that.
COMMISSIONER ROBINSON: Thank you.
MR. WOLMAN: I have a couple comments on this.
COMMISSIONER ROBINSON: Yes, please.
MR. WOLMAN: I think the most relevant one is the one I would make. I have no -- I want to make two points. First, I have no problem with going to state enterprise because I'm not enough of a free enterpriser to say I don't want state enterprise, okay? So to me that's, you know, an irrelevant question.
The thing that interests me in the Petrochina thing is, is it possible for the investment bank -- to find some kind of a Sullivan system, you know, as we had in South Africa, of the investment bankers. What the hell are these guys doing with the money, what are they doing, the people with the money, what is it they're doing to our people. So the fact of the matter is, I'd like some sort of set of Sullivan rules so I want -- I'm really going to change my metaphors now, the investment to be kosher from our point of view before they do them.
I have no problem with the idea. I think it's a great idea as a matter of fact.
PROF. COHEN: I think it would be a great mistake to try through government control to limit access to U.S. capital markets to Chinese enterprises even state owned enterprises that have converted now to joint stock companies. We have standards. If they're not adequate, we should improve the standards.
Secondly, we have mechanisms for enforcing those standards. I've been involved in litigation that's been brought against investment banks that have helped certain joint ventures between North American companies and Chinese companies that have gone onto U.S. capital markets and they've been accused of not making accurate reporting disclosures, have been insufficient, inaccurate. We have mechanisms for going.
Also, I don't know of any scandal of any significant proportion where the American public has been bilked by these enterprises. I say leave it to the market, leave it to the democratic process to do things as we've done with South Africa, more recently with China. Let people decide whether they think these risks are worth it or not. The market has already put its own evaluation on a lot of these Chinese state owned enterprises and they've been seen to be both in Hong Kong and here, not great investments.
MR. WOLMAN: I've learned a lot from what you've just said, but I would like Sunshine to --
PROF. COHEN: Sure, I'm not against that.
COMMISSIONER ROBINSON: To strengthen disclosure requirements would not be something that you would oppose, I take it, because that's a market-oriented event.
PROF. COHEN: Not at all but we ought to have adequate disclosure requirements for all companies and not only Chinese companies.
COMMISSIONER ROBINSON: Right.
MR. KEARNS: But the Sullivan principles did not leave it to the market. I mean, that is not markets doing their magic. The Sullivan principles were anything but.
PROF. COHEN: I simply want to say, leave it to the market and the democratic process.
CO-CHAIRMAN MULLOY: If we could now, I'm going to call on Commissioner Becker.
COMMISSIONER BECKER: It's getting late in the day and I'll make it as quickly as I can for everybody. I would have liked to have felt encouraged, Mr. Wolman, in reading, following along, in your remarks. I can't say that I was, as far as the future is concerned, as far as workers are concerned and as far as the transfer of capital and the effect that this has on workers and families and communities.
One point that you raised in there of -- in that you drew a correlation with Germany and with Japan after World War II and talked about 30 or 40 years of catch-up time, so to speak for wages and benefits and all that to catch up.
MR. WOLMAN: Yeah.
COMMISSIONER BECKER: One thing I would point out, there was a free trade union movement in Germany following World War II which was sponsored and helped fostered by the United States Trade Union Movement that went over there, the same thing happened in Japan. You had a Free Trade Union Movement so that the workers were able to, when circumstances permitted, they were able to share in the wealth that they helped create. Can that be in China where you have a repressed society and you do not have a free trade union movement? Can that be in a totalitarian country? Can we have that catch-up?
MR. WOLMAN: If you're asking what we pressure for, to me this is basically unacceptable. What you're saying is basically correct. A lot of the reconstruction of Europe and of Japan actually after World War II -- I mean, those were my days in some sense. I was relatively young and under those circumstances, I knew a lot of guys who ultimately were involved in this kind of thing and some of them were from the Trade Union who had an integral -- had a really integral role in those countries. I mean, I can remember this very, very well.
And I think there's a lot to be said in favor of that kind of thing. The trouble is that the, you know, the movement has eroded. Now, again, I'm not enough of an expert to really say about this thing, but the other question you asked is am I very cheerful about the future? I speak neither for Business Week magazine, or for the McGraw Hill companies, but I'm not particularly bullish, okay. I think the Bush 43 economy is going to look a lot like the Bush 41 economy.
COMMISSIONER BECKER: But my question though, my question though, really is can we have a catch-up --
MR. WOLMAN: I haven't wrote the book about this thing.
COMMISSIONER BECKER: -- situation in China? Can we have a catch-up situation in China without having a free trade union movement? Do we have a free trade union movement in Taiwan?
MR. WOLMAN: Go ahead on this one.
MR. HAMMOND-CHAMBERS: Taiwan's trade unions are actually quite evolved and very active particularly within the state owned enterprises.
COMMISSIONER BECKER: The answer is yes.
MR. HAMMOND-CHAMBERS: Yes.
COMMISSIONER BECKER: We have a free trade movement in Taiwan and the answer is we don't have one in China.
MR. WOLMAN: Well, you guys go do something about it, okay?
COMMISSIONER BECKER: Well, can we rebuild? My question is, in your opinion, can we rebuild -- can we get into a catch-up, can we catch up to the standards like we did in Germany and Japan to the United States without developing a Free Trade Union Movement in China?
MR. WOLMAN: I think we'd be very hard pressed to do so.
MS. COLAMOSCA: No, just if you look at some of the numbers going back to Bangalore, the medical transcriptionist here is paid about $25,000.00 a year and there and their wages are fairly good, you know, for Southern India, they're being paid $125.00 a month. And Mr. Muhrti said that he is frightened to death of the Chinese software companies coming on line because they're being paid a tenth of what his workers are being paid, so I don't see how we can catch up.
PROF. COHEN: That sounds exaggerated.
MS. COLAMOSCA: Really?
PROF. COHEN: Yeah.
MS. COLAMOSCA: Which numbers?
PROF. COHEN: A tenth?
COMMISSIONER WESSEL: I'll yield my time.
CO-CHAIRMAN MULLOY: Okay, he's yielding a second to you.
COMMISSIONER WESSEL: A quick question; I believe it was in '94, it may have been '95 that the administration proposed -- wrote and proposed a voluntary code of conduct for U.S. businesses doing -- having operations in China. Following up on the disclosure issue that Roger has raised here a number of times today, is it appropriate for us to ask as a matter of disclosure if those companies should disclose whether they were abiding by the voluntary code of conduct in terms of their access to capital markets?
PROF. COHEN: Sure.
CO-CHAIRMAN MULLOY: Let's turn to Commissioner D'Amato.
CHAIRMAN D'AMATO: I'm going to be very brief but I just wanted to mention that I think that the discussion on Taiwan that we've had today is really rather important for this Commission. We'd like to work with you in terms of developing a better understanding of the nature of that relationship and the puts and takes and what those flows are like. I think we're interested particularly in not only who's dependent on who which I'm not clear who's dependent on who, maybe there's something in a third place that's controlling everything, I don't know, but the transfer and -- that transfer of high technologies via Taiwan into the mainland, I don't know to what extent that is the developing issue, whether the mainland -- whether the PRC is using the tremendous relationship now developing with the Taiwanese business community to try and acquire technologies more conveniently than it otherwise might or just what the nature of this relationship is in terms of, you know, maybe the whole military overlay is more and more irrelevant to what the importance of the Taiwan relationship is to the PRC.
MR. HAMMOND-CHAMBERS: Firstly, it would be an honor to work with this Commission on this issue to the extent you feel that there is value in doing so. Secondly, in respect to the triangular relationship between the United States, Taiwan and China and the technology space, this is not, for the most part, cutting edge technology, not yet. Really, the evolution of the global technology supply chain and Taiwan's role in that is really characterized by the production of low end technology products, the sorts of products that go into our personal computers and our laptops that you can buy now for $799.00.
You know, quite frankly, the majority of those products now probably have been made by a Taiwan company even though they reflect the United States brand. In respect to intellectual property itself, what we are beginning to see now is U.S. technology companies in Taiwan still, not really in the mainland, but in respect to R and D, you're seeing U.S. companies start to construct quite significant research and development facilities in Taiwan's technology parks with the idea of producing technology specific for a greater China market.
For them that first and foremost interestingly encompasses the overseas Chinese, all the global Chinese communities that are now interwoven by the Internet, who can access goods and services through the Internet and who can purchase things through the Internet. It is this community that is invariably well educated, quite affluent and Internet savvy. And you're starting to see high end products starting to be developed by some of Taiwan's technology companies in conjunction with U.S. companies.
A good example is Microsoft's relationship with a company called Gigamedia, and they're starting to focus on the more high end products specific for Chinese around the world. And it's that joint development of intellectual property for the market itself that I think is something to keep an eye on. I don't believe at the moment that we're circumventing any laws, certainly not that I'm privy to.
CHAIRMAN D'AMATO: There's one matter that came to my attention. I don't know how true this is, that the Deputy or Vice Chairman of the Koumintang apparently went on kind of a state visit to Beijing and recently was greeted by the visiting potentate or that sort of thing. Is that accurate?
MR. HAMMOND-CHAMBERS: Well, Vincent Siew, who is the Vice Chairman of the KMT, just did travel to Beijing in his capacity as Chairman of the Cross-straits Common Market Foundation, which is a concept that he's pitching in Taiwan which has, in fact, the backing of Chen Shui-bian and in the mainland where he got a relatively cool reception, I'm not sure specifically because of the concept that he was pitching and more because he has sort of attempted to push the Beijing leaders to start talking with Chen. I think that was probably the reason that he received the relatively cool reception while he was there.
But this concept of the cross-strait common market is an intriguing one since the Europeans have used the common market concept to either build walls or tear them down, depending on your perspective.
PROF. COHEN: I just wanted to say in this regard one ought to give some attention to the implications of WTO entry for both Taiwan and the mainland because people don't see clearly enough what this will mean and many of its reverberations, but I think they'll be significant.
CHAIRMAN D'AMATO: And does that mean that there will be more U.S./Taiwan combinations of business that will then try to penetrate the mainland?
MR. HAMMOND-CHAMBERS: I believe that that's the trend to be perfectly honest. It's going to be -- if you focus in on the World Trade Organization, there are actually a number of very significant issues in the Taiwan/China relationship coming down the pipeline that we're not talking about at the moment, specifically, again, we come back to this issue of Taiwan's sovereignty.
And a working example of that would be if Taiwan allows its banks to go to the mainland, who would be the entity within Taiwan to guarantee the legitimacy of those banks? Will the Chinese Government now start recognizing and talking with the Ministry of Finance or is there sovereignty issues there and it's not clear what mechanisms they're going to need to develop, whether those are NGOs or some other mechanism that we're not aware of to allow the different governments to talk with one another in an acceptable framework.
PROF. COHEN: Also the mainland wants access to the markets in Taiwan and I think the next step is those markets will start to open to investment, et cetera.
MR. WOLMAN: But there is the other side which has been made before, which is that this triangular thing, I mean, does give China a great deal of power over the American economy because my understanding is they can shut down the computer -- I mean, I'm probably exaggerating, they can do great damage to the computer business at this very moment.
MR. HAMMOND-CHAMBERS: They could but it wouldn't serve their interests --
MR. WOLMAN: No, no, but it depends on how they -- you know, not the way you define their interests but they may change the way they define their interests.
MR. KEARNS: You don't need to shut it down and cut off all your profits. Merely the threat of action in some cases, the threat of cut-backs, et cetera, are enough to produce results, political or economic results that you want.
CO-CHAIRMAN MULLOY: Now, I want to ask a question. Ambassador Barshefsky stated on page 1 of her prepared testimony, quote, "The November 1999 agreement that she negotiated on China's WTO accession, secures broad ranging, comprehensive, one way trade concessions on China's part, granting the U.S. substantially greater market access across the spectrum of industrial goods, services and agricultural", end quote.
Some critics of the agreement contend it is unfair to depict this as a one-way concession. They contend that the Chinese are not stupid negotiators and what they got was to lock the market open of America.
In other words, giving China permanent MFN and entry into the WTO means the United States gives up its option which it presently has, to use its market as leverage on the Chinese in either commercial or political disputes. This assurance, they contend will encourage U.S. manufacturers to invest in China and sell back here to increase profit margins and I wanted to start with Professor Cohen.
Do you think such criticisms of Ambassador Barshefsky's depiction of a one-way concession by the Chinese has any merit?
PROF. COHEN: Well, I'm glad you asked that because it raises a question I had in listening to other testimony. On the one hand, we heard from Mr. Trumka that China's WTO entry means we have given up all our unilateral trade measures against China, 301 and all that.
On the other hand, Ambassador Barshefsky assured us those aren't effected at all and I assume we also have our anti-dumping, et cetera. So that if we find violations on Chinese -- on the part of Chinese entities and government agencies, et cetera, I take it we still have options to bring pressure against them, apart from doing it through the WTO, but we have to ascertain what's the correct understanding of the legal position.
CO-CHAIRMAN MULLOY: We asked for CRS to give us a legal memo on 301 and they did, and the way it works is, you have to first win your dispute in the WTO, then you use 301, but you can't use 301 --
PROF. COHEN: That explains that apparent contradiction between the two statements.
CO-CHAIRMAN MULLOY: Right, that's what the CRS analysis would suggest. Do you have any comments on that, that it was a one-way concession on the part of the Chinese? Kevin?
MR. KEARNS: Yes, I guess I would say, has anyone in this room ever heard a U.S. trade negotiator come back from a long and arduous trade negotiation and say, "I've failed"? No. I mean, every trade agreement that I have witnessed in the past 30 years has always been the greatest and it is going to increase our access, it's going to do X, Y and Z and then two years later we are back negotiating some sort of protocol.
We negotiated three separate intellectual property agreements with the Chinese during the last decade. Each one, if you look at the announcement was going to end the problem and it didn't. I think that Ambassador Barshefsky means well. She worked hard on it.
The fact that it's taken almost two years to get where we are today, that is the recent agreement that Mr. Zoellick concluded where apparently we agreed on an agricultural subsidy at 8.5 percent, between five and 10 percent but closer to the 10 percent, indicates that a lot of things weren't nailed down in that trade agreement. The figures on their, grain supplies, grain reserves, et cetera, indicate that a lot that was negotiated in agriculture and promises made to the farming community simply are not true in terms of China being a market.
Again, I think the WTO is a mistake; that we should use U.S. unilateral actions; and we can enforce access to foreign markets by denying access to ours. I think that's the most effective. We don't oppose greater trade. The question is, it has to be balanced. It is not in balance. It is terribly imbalanced right now and it is going to lead sto some sort of financial catastrophe, a collapse or some sort of rejiggering.
CO-CHAIRMAN MULLOY: Jerry?
PROF. COHEN: I think we do need greater transparency in the U.S. Government with respect to learning about the details of a lot of things that has been indicated here are not really given to us up front. The truth seeps out gradually.
CO-CHAIRMAN MULLOY: Yeah.
PROF. COHEN: I think secondly, however, to the extent we know this, we are benefitting from this deal. It's going to be a better situation than existed prior to China's WTO entry but I can't tell you there aren't going to be a lot of problems and a long process but Barshefsky herself recognizes this. I like the Chinese phrase, Chu yu ego cuatung (phonetic), which means Rome wasn't built in a day. Everything requires a process. And I think we've seen huge progress since 1978 December when this whole thing started. We mustn't lose sight of that but it's been inch by inch by inch.
But looking back over 23 years and I've been involved from Day 1, the progress is tremendously significant but insufficient.
CO-CHAIRMAN MULLOY: Let me thank all of you on behalf of the Commissioners and the Commission for being here today and presenting very, very thoughtful testimony and for being very responsive to the questions.
Mr. Wolman, I thought the point you made about what globalization is doing to working class and it's going to move up the food chain, and the need to really take care of those issues in our own society was right on the mark and I think it will cause is to think through some of these issues as we move along, but thank you all for being here.
MR. WOLMAN: Thank you very much. I would just like to say that I learned a great deal during the time I was here and thank you.
CO-CHAIRMAN MULLOY: Thank you.
(Whereupon, at 4:42 p.m. the above-entitled matter was concluded.)

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