SEN. LUGAR: (Gavel.) This hearing of the Senate Foreign Relations Committee is called to order.

The committee meets today to consider the nomination of Robert Zoellick to be deputy secretary of State. Ambassador Zoellick has served the last four years as President Bush's United States trade representative. He has a distinguished career as a public servant having worked in high positions in the Treasury Department, the White House, and the State Department during several administrations. He has also excelled in the private sector, having served as executive vice president of Fannie Mae.

American credibility in the world, progress in the war on terrorism, and our relationship with our allies will be greatly influenced by the effectiveness of the State Department in the coming years. The department functions best when it has the benefit of a talented and experienced deputy secretary who is trusted by the president, the secretary of State and the Congress. Ambassador Zoellick is highly qualified to meet this challenge. He will bring to his new job not only the experience in international affairs which he has gained as our trade representative, but also intimate working knowledge of his new responsibility at the State Department.

Under the first President Bush, Ambassador Zoellick served as undersecretary of State for Economic and Agricultural Affairs, as well as counselor to Secretary of State James Baker. During that time, he played a major role in many important developments across the globe. He was a senior official at the Two-Plus-Four talks, which helped bring about German unification. He was the lead State Department official involved in launching the Asia Pacific Economic Cooperation Forum. He played an important role in the State Department's efforts to bring peace to El Salvador and to Nicaragua.

Ambassador Zoellick has also displayed an excellent capacity to work with Congress. In 1991, he, along with other officials from the first Bush administration, spent many hours briefing Congress on what was then called fast track authority to enable the president to negotiate trade agreements. However, years later, as the U.S. trade representative, he served as one of the point men in an effort to renew fast track authority. His tireless efforts helped win approval of what we now call Trade Promotion Authority, one of the most important victories of President Bush's first term.

I'm pleased to note that he has worked also with Congress to expand the African Growth and Opportunity Act, which I introduced, and to pass the Vietnam Trade Agreement, and the free trade agreement with Jordan.

The committee expects that Ambassador Zoellick will bring to the deputy secretary's job the same energy and hard work he has devoted to his role as our chief trade negotiator. In four years, he's successfully negotiated free trade agreements with Singapore, Chile, Australia, Morocco and Bahrain, as well as CAFTA, a free trade pack with five Central American countries and the Dominican Republic. He started trade talks with Thailand, Panama, the Andean countries, and the South African Customs Union. He has worked with Congress to get many of the completed agreements enacted into law. He did all this while overseeing the launch of the current Doha round of multilateral trade talks involving 144 countries.

The issues involved in the Doha Round, particularly the goal of changing the current worldwide system of agricultural subsidies, are very significant, but also very sensitive for the United States, the European Union, and developing countries. Ambassador Zoellick has done an excellent job of handling a difficult, and often contentious assignment.

During the last four years, the Foreign Relations Committee has enjoyed a close relationship with Deputy Secretary of State Armitage, who has been a good friend to the Congress, and appeared before us many times. He testified on many of the most critical policy topics, including Iraq, Iran, and North Korea. We counted on him for enumerable consultations and he took personal interest in committee initiatives, including our efforts to strengthen the State Department's post-conflict stabilization and reconstruction capabilities, and to improve nonproliferation programs. We are eager to establish a similar relationship with Ambassador Zoellick, and I am confident we will do so.

Ambassador Zoellick, we welcome you to the committee, we look forward to a dialogue that will illuminate your thoughts on the direction of the United States foreign policy, the management of the State Department, and many other topics.

Before I call upon you for your testimony, it's a very great pleasure to welcome my great friend, distinguished statesman, and chairman of the Finance Committee, Senator Grassley for an introductory statement.

SEN. GRASSLEY: Thank you very much, Mr. Chairman. It's a privilege to have been asked to help sponsor Ambassador Zoellick before this committee, because I'm the senator from Iowa, and he has not lived in Iowa, but he is an Iowa resident because he's visited our state fair. (Laughter.)

But also because I see Ambassador Zoellick as one of the very best examples of public service, either capitalized or small letters, the very best example of public service, a person who gets into a job, just gives it all the time that it needs and more, more importantly giving up what most public servants take as an American right, having weekends off, and evenings at home watching television and everything else. I don't think Ambassador Zoellick, at least as I've seen his work, has ever had an opportunity to do much of that. And I use that as a measure of a good example of public service, with the emphasis upon public as one word, because the public good is upper most in his mind, and secondly the service it involves to get that done for the public.

And I have a long statement, and I think you anticipated my statement, because I was going to go into a lot of work that he has done in his job as trade representative, but most importantly highlighting one little thing you said, well, one big thing you said and that was, getting this whole process started, getting Trade Promotion Authority back to the president after six or seven years, maybe eight years, that the president didn't seek it and didn't have it. And without Trade Promotion Authority, you can't get done in the United States what needs to be done to promote jobs, and that is to have export policy that encourages leveling of the playing field. And so, with Trade Promotion Authority firmly in hand, then Ambassador Zoellick did what he promised Congress he would do: he aggressively advanced the nation's trade agenda, and you went through that.

Through his hard work and tenacious attitude, he initiated then an additional number of free trade agreements, which are right now as he leaves this position not entirely completed, but when they are I believe will significantly benefit our economy. And perhaps even more importantly, his creativity proved to be key to unlocking a positive framework for the present round of Doha World Trade Organization negotiations. And in this regard, obviously, it's sad to see him go, but with confidence that his successor will have the same drive and creativity needed to ensure these negotiations lead to a successful end.

On a personal level, I have found the ambassador to be a good ally, and more importantly a good friend, so I don't have to own a dog in this town. He is genuinely responsive to the needs of committee members, and to Congress as a whole. He is always prepared, and you're going to find that today. In fact, as his staff can tell you, it is a rare day when he does not know more about the subject at hand than anybody else in the room. Most importantly, Ambassador Zoellick has strategic vision and a key understanding of international politics way beyond just the trade issues.

He does not make a move on the international stage without understanding how that move fits into a broader international agenda. I appreciate his commitment to public service, his keen intellect, his genuine desire to do not just what is politically expedient, but what is right, and when he does what's right, that also benefits the politics. There is no doubt that we're going to miss his service at the USTR, but I'm confident, should he be confirmed, and I think he will be, as deputy, he will bring the same dedication, the same passion, the same intellect, the same strategic vision to this new post that he did as U.S. trade representative. To that end, I'm confident that should he be confirmed, he will make great contributions towards helping our foreign policy advance. I believe the committee will find Ambassador Zoellick to be an outstanding candidate. I recommend his nomination.

And thank you, Chairman Lugar. And I would like to have my entire statement put in the record.

SEN. LUGAR: Your entire statement will be made a part of the record, and we thank you very much, Senator Grassley, for making that statement this morning

I'm going to recognize your partner in Finance Committee, and then recognize the distinguished ranking member of the committee before we move to Ambassador Zoellick's testimony. But it's a real privilege to have Senator Baucus, a good friend of the committee, distinguished ranking member of the Finance Committee with us today.

SEN. MAX BAUCUS (D-MT): Thank you very, very much, Mr. Chairman. It's a real honor to be here, frankly, to introduce Ambassador Zoellick to the committee and to follow my good friend and chairman of the Finance Committee, Senator Grassley. It's not often that we have opportunities to recommend people of such high stature to such important jobs, but we certainly do today, and it's a real honor for me, because I believe so strongly in Robert Zoellick.

Our relationship really didn't get started off on the right foot, I might add. (Laughter.) I looked at this guy and wondered, what's going on here? He's extremely bright. I probably was envious of his intellect, and of his running ability. I think he's run a 2:20 marathon. I fancy myself sometimes as a runner, but nowhere near 2:20 in a marathon. And he seemed to kind of have it all -- prior experience in the State Department and other agencies.

But, I want to tell this committee very quickly, Bob Zoellick became a good friend, and it's because he worked on the relationship. He came to me, he asked my advice. He told me what he thought. He was candid, forthright. I didn't always agree with the administration's trade policy, I must say. And I don't know if Bob Zoellick, to be frank, also always agreed with the administration's trade policy. But, he is so good in furthering the goal of the administration, and so good in helping advance the ball in virtually every area that I can think of, and more importantly his candor, and his forthrightness, and his perceptive ability to kind of help us move forward.

On another level, I must say that he's a man of his word. I asked him some time ago if he could set up sort of a kind of a "Montana Round" of the U.S.-Thai trade negotiations in Montana, and meet in Montana. And he said, "Yeah, that's a good idea. Let me look into that." And I thought, well, gee, he'll look at it and, you know, that'll be the end of that. But, no, one day I checked my e-mail --

SEN. BIDEN: Were you chairman then? (Laughter.)

SEN. BAUCUS: No, I was not chairman then. (Laughter.) I was not chairman then. I checked my e-mail one night and there was an e- mail from Bob Zoellick. And he said, "I think that's a good idea. So-and-so is looking into it, and we'll get back to you." And then it went back and forth in emails, and lo and behold, we're having a Montana round of the U.S.-Thai trade negotiations.

So I'm not going to repeat all the accomplishments that my good friend Chairman Grassley mentioned. He did it far better than I could. But, I just wanted to say, at least on a personal level, in addition to all the compliments that the chairman has given to this committee on behalf of Ambassador Zoellick, that I personally think he's a very good man, and we are so lucky as Americans to have Bob Zoellick serving us in the government, particularly in a very high position as deputy secretary of State.

SEN. LUGAR: Thank you very much, Senator Baucus. I know Senator Biden joins me in thanking the distinguished chairman and ranking member of the Finance Committee. It's wonderful to have this association with your committee today, as we come together to hear Ambassador Zoellick. As you need to be excused, please feel free to leave, or to stay, as the case may be. But, we're grateful to you for coming.

Senator Biden.

SEN. JOSEPH BIDEN (D-DE): Thank you.

Before Chairman Grassley left, Ambassador Zoellick, I was for you until I heard how much Senator Grassley liked you, and I'm forced to reconsider. But when I -- I just want you to know that his comparing you to a dog was meant as a compliment. (Laughter.) I just want you to -- I don't want you to be -- you know, diplomacy, there are different forms of diplomacy. But, all kidding aside, it was great to hear Senator Grassley's comments, as well as Senator Baucus. And they reflect, quite frankly, the universal view of anybody who has worked with you. And I have a statement here that I'm going to ask to be placed in the record. Just let me make two brief comments, Mr. President (sic.)

SEN. LUGAR: (Inaudible) -- in the record in full.

SEN. BIDEN: It's often talked about these days that we need people who are, as the secretary announced, this is going to be the --

SEN. GRASSLEY: (Off mike.)

SEN. BIDEN: (Laughs.) I was only kidding, Chuck. (Laughter.) Are you a St. Bernard, what is it? (Laughter.)

All kidding aside, the secretary has indicated this is a time for diplomacy. And the best combination I've observed in my time here, as someone engaging in diplomacy in a difficult time, is not only to have good instincts, and basic diplomatic skills, which you obviously have, but to also be, as was related about you, fact-based.

I used to have a friend on this committee, actually not in the committee, the assistant Republican leader, Senator Simpson. Who in debate, he was a great debater, and in a debate he would occasionally stop and he'd look at Senator Obama, he didn't know him, but he'd look and he'd say, well, I'd say my friend is entitled to his opinion, everyone is entitled to their own opinion, but they're not entitled to their own facts. And one of the things I've observed about Ambassador Zoellick, he always knows of what he speaks.

We may or may not disagree, and I'm not at any disagreement. But, he does his homework, as has been mentioned here. There's a lot of homework to be done, because, quite frankly, the diplomatic skills you brought as our trade rep -- and it required significant diplomatic skills, significant diplomatic skills, the contacts you made all over the world, the contacts you've made, and the respect you've earned are going to serve us very well.

But what gives me some solace here is, you have a prodigious intellect, and a serious, serious work ethic about knowing what the facts are. And you're going to be moving into areas you've not dealt with before, areas that you have not had to know a great deal about, from proliferation to the training of Iraqi forces. And I feel very, very good about the fact that there's going to be someone with your background, and your demonstrable capability who's willing to come and take a fresh look at some of this, to actually take a look.

I don't think it's telling tales out of school, Mr. Chairman -- my friend from Nebraska will appreciate this -- I suggested that the secretary actually pick up the phone and call some of the colonels and generals and commanders that we've all dealt with in Iraq, to actually physically go. I have great confidence in his objective capability to discern what the facts are.

And so I'm anxious for you to get on the job, Mr. Ambassador. I'm anxious that you take this, what will have to be in some cases a fresh or initial look at some things you have not dealt with before. And I'm confident that whatever perspective you leave with will be one that's more informed. And that's what I'm looking for, an informed opinion based upon your own initial and consistent follow-up in terms of essentially research, and suggestions to the secretary as to how to proceed. But you are going to be doing a lot, I suspect -- a lot more active diplomacy than your predecessor, who I think is one of the best guys I've ever worked with in your government -- than your predecessor has, because the secretary can't be everywhere. And so I look forward to working with you. I think the secretary had made a great recommendation, and the president has made a great choice. And so I obviously welcome this nomination. And, again, I ask unanimous consent that my formal statement be placed in the record.

SEN. LUGAR: It will be placed in the record in full.

SEN. BIDEN: Welcome.

SEN. LUGAR: Thank you, Senator Biden.

We look now to our nominee for his opening statement. Ambassador Zoellick.

AMB. ZOELLICK: Well, thank you, Chairman Lugar, Senator Biden, members of the committee. At least as a trade negotiator my bite was worse than my bark.

I'd like to thank Senators Grassley and Baucus for their friendship, partnership and thoughtfulness in introducing me today. Although I would have been delighted to have hailed from Iowa or Montana, it was not residence or roots that prompted me to ask them to accompany me this morning. Over the past four years of service as the U.S. Trade Representative, I worked closely with both senators during their skilled leadership of the Finance Committee, and I believe the three of us are proud of what we have accomplished together. And as they hand me off to a new committee, I wanted you to know the high priority that I assign to listening to your interests, learning from your experiences, and working together to pursue America's purposes around the world.

I'd also like to thank you for taking the time during a busy period to talk with me individually. Our discussions have given me a much better understanding of your ideas and concerns, and frequent subsequent consultations with this committee are important to me. So, if confirmed, I look forward to working very closely with you.

Of course I had the opportunity to work with many of you over the past four years on trade topics, and along the way probably learn more than I ever expected about the economic interests that inform the international outlooks of your states. I've also gotten to know many of you over the 30 years since I first served our country as a very junior public servant during a long distant Ford administration. And, in particular, as the chairman noted, I had frequent contact with the Foreign Relations Committee during the tumultuous, rewarding period of 1989 to '92, when I served as an undersecretary of State.

For members of the committee with whom I have not had the opportunity to spend much time, I look forward to doing so. And especially during my tenure as U.S. Trade Representative, I learned how active outreach and consultation and consideration -- of course debate -- are critical to the effective performance of an executive official's responsibility under the U.S. Constitution.

I'm honored and appreciative that the president nominated me to serve this country in this new post, and I certainly understand the importance he vests in America's conduct of foreign policy as we pursue the transformational goals he set. I respect the serious responsibility that Secretary Rice has proposed to share with me when she suggested this assignment, and I want to thank her for the opportunity to contribute. As colleagues and friends over 16 years, I know very well her commitment to guiding and driving a transformational diplomacy to achieve the president's goals.

As the secretary also mentioned to this committee, and as Chairman Lugar and Senator Biden both referred to, we've been fortunate to follow Secretary Powell and Deputy Secretary Armitage, who have served America extraordinarily well time and again with honor and conviction. And in particular I've already seen their attention to the management of the State Department has set an exemplary standard.

Now, given that the president has outlined recently his foreign policy vision, and pointed to key directions in both the Inaugural and State of the Union Addresses, and because Secretary Rice spent hours with you going over particular matters, it would be presumptuous -- and, in total candor, imprudent -- for me to present a policy statement this morning. But I read closely the transcript of the secretary's confirmation hearing so as to better appreciate your questions, and of course to try to stay constant with her answers. While of course recognizing the inevitable differences of opinion or degrees of concern about specific matters reflected in your exchange with her -- and that's inevitable and appropriate in a vibrant democracy -- I cannot help but be struck by the value of that exchange. At times the debate may be uncomfortable, but I assure you that we recognize the need to consider new information and changing circumstances, identify new issues, integrate other perspective, subject analysis to tough scrutiny, challenge assumptions and learn lessons. After all, you -- and if confirmed I -- have a very serious charge: the high duty to advance U.S. security, economic and political interests and values around the world in a fashion that warrants the support of the American people and fulfills our oath of office. And I just wanted you to know I take such matters very seriously.

I thought it would be helpful for the committee in considering my nomination to have an outline of the duties that I hope to perform to the best of my abilities.

First, I would support the secretary as the administration develops policies in priority areas. As your hearing with Secretary Rice pointed out, the top two matters are the critical follow-through on Iraq after the successful elections there, and working with Israel and the Palestinians to achieve the goal of two democratic states living in peace.

Second, working with the undersecretary for management, I would assist the secretary by supervising operations of the State Department, including budget and resources, facilities and personnel. And, in particular, I hope to help the secretary as we take on the challenge of strengthening America's public diplomacy -- a subject I know is of very strong interest to the committee.

Third, the secretary has asked that I assist in the conduct of U.S. diplomacy abroad. When the secretary announced her first trip abroad, to Europe and the Middle East, she also announced that, if confirmed, I would visit all the other NATO capitals, so together we would be consulting directly with 26 alliance partners early in 2005. I also hope to arrange a session with the European Parliament, as I did shortly after becoming the U.S. Trade Representative in 2001, and will maintain my close ties of the various institutions of the European Union.

The secretary has suggested that I follow up Secretary Powell's and President Bush's prompt visit to the Southeast Asian countries hurt by the tsunami to assess how we can assist in the reconstruction in countries in which I've had frequent contact.

Following up on the president's meeting with President Hu of China, I hope to expand make regular our dialogue with China on regional and international issues, terrorism, trade and economics, and other topics.

I hope to build off my activities over the past years with countries throughout Latin America and the Caribbean to advance our diplomacy in this atmosphere.

Last year I traveled to sub-Saharan Africa three times, including West, southern and East Africa, and I'm proud to have been the very first USTR to have visited sub-Saharan Africa in 2001.

My fourth duty will be the participation in the interagency policy process. I've been working closely with departments over the four years -- Treasury, Commerce, Agriculture, Labor, Homeland Security, OMB, EPA -- and my colleagues at the Pentagon have already been gracious in starting to provide briefings in areas with which I have not been involved directly.

Fifth, I hope my experience with international economic issues will help me to integrate U.S. economic interests into our political and security strategies around the world. In addition to my past service or work with economic agencies -- I've been fortunate to serve in the Millennium Challenge Corporation Board, have worked with AID on integrating trade and AID in our development work, and have experience working with the multilateral development banks. The secretary has asked in particular that I assist in supervising the coordination of our political economy, democracy and capacity-building work in the broader Middle East. I've already been working with many of these countries through the president's initiative to create a Middle East free-trade area; and, as I've discussed with a number of you, I hope my office can also serve as a familiar point of contact at the State Department for the wide ranging network of business and farmer leaders with whom I've had the privilege to work.

Finally, but vitally, given the importance the secretary assigns to our work with Congress, I want to assist her in ensuring that we listen and respond to your concerns and interests. I was pleased to see the interest of many of you and prompt congressional action on the U.S. free-trade agreement with Central America and the Dominican Republic. And as the official who signed that agreement for the United States, I certainly want to work with you to achieve that goal.

In closing, Mr. Chairman, I want to say that I consider myself very fortunate over the past four years to have worked with an extraordinary group of public officials at the Office of the U.S. Trade Representative. They're highly motivated, incredibly hard working, extremely responsible, and directed towards achieving real results for the people of the United States. The State Department is of course much larger, covering the Foreign Service, Civil Service, foreign service nationals and details from many department. But my frequent visits to our missions overseas, small and large, have reinforced how fortunate the United States is to have such a committed core of public officials. If confirmed by the Senate, I will benefit from their considerable experience and insights, and it will be an honor to serve with them.

Thank you, Mr. Chairman.

SEN. LUGAR: Thank you very much, Ambassador Zoellick.

We have good attendance of the committee members this morning. The chair will suggest that we have an eight-minute time limit on our first round of questions, so that we can get to senators as rapidly as possible.

I'll commence the questioning by pointing out, Ambassador Zoellick, that commercial ties with emerging market nations often help promote democracy and stability. There are a few countries that remain subject to the provisions of the Jackson-Vanik Act, which prevents permanent normal trade relations with the United States. Currently most notable of these is Ukraine, which has demonstrated a commitment to meet its immigration requirements of Jackson-Vanik, and to abide by free-market principles and good governance.

Last month, Senator Levin and I introduced legislation to revoke Jackson-Vanik for Ukraine. Do you support this legislation? And, if so, are there areas of concern that you might have with it?

AMB. ZOELLICK: Well, Mr. Chairman, the president feels strongly that we should try to remove Jackson-Vanik for both Ukraine and Russia. The bill has some provisions that cause us some pause, and I'll identify them briefly, and then I'll be happy to work with you on them.

First, it would require a vote on bilateral market access. And the reason that would cause a problem is, first, we have 147 other members in the WTO; we've never had a vote on those members. And so while respective of Congress's constitutional authority, the executive branch also has a constitutional authority to protect. But, in addition, the bilateral agreement is really one of three parts, Mr. Chairman. There's a bilateral agreement that we do; but then under the most-favored-nation provision we get the benefit of all the bilateral agreements that other countries do. And, third, we negotiate with other countries the multilateral rules and access. And in fact when I work closely with the business and farm communities, they want to know how all three fit together. So to have a vote at that time I think would probably be a problem in proceeding.

And, second, I wanted to draw your attention, chairman, there's a provision at least in the bill that I saw that would require us to include a special safeguard that was included in the China accession. There are safeguards in the WTO already, and it may be the case since Ukraine is a very different type of economy than China that we may not need such a safeguard, and other countries may not feel it is appropriate. And so ironically if my successors have to follow that statutory requirement, we could unintentionally delay the accession process for Ukraine, which I know is not your purpose.

So on the principle of removing the Jackson-Vanik, four square behind you on some of these items -- perhaps we could talk further with your staff.

SEN. LUGAR: Well, I would welcome that. I appreciate your specific and informed comments about the legislation, because we're hopeful it might move, and so we look forward to working with you on that.

Now, secondly, last November I introduced legislation designed to improve the State Department's ability to eliminate conventional weapons around the world. In response, I understand that the department believes -- and I quote, "There is a requirement to destroy large excess stockpiles of conventional munitions," end of quote. This legislation does address a need not adequately covered by current state programs, tools and resources available are presently insufficient to address the threat. I would ask that you look into this issue, and into the legislation specifically, because I think we have a real opportunity to make progress in the area, and I say this on the basis of visually sighting 79 MANPADS during a mission to Albania in August, which really triggered some concern -- not only about weapons of mass destruction, but some very conventional arms that are potentially of great danger in the hands of terrorists. Do you have any comment about this area to begin with? And, if so, why? Would you please proceed?

AMB. ZOELLICK: Well, chairman, you and I had a chance to talk about some of the travels you made. And, as I mentioned to Senator Biden and others, it's one of the reasons frequent contact is very helpful, is to get an on-the-ground sense. My understanding, chairman, is that there's general support for the principles of legislation; there's some concern about whether it directs certain structural actions. But I think people consider it to be a constructive direction. We'd like to work with you on it.

SEN. LUGAR: Very good. Well, we would like to proceed rapidly with you, and we'll look forward after your confirmation to proceeding.

Third, I'd like to discuss for a moment the African Growth and Opportunity Act. Last year the third amendment to that act was signed into law, extending third-country fabric benefits that had been critical to the development of the textile sector. One of the key goals of AGOA has been to build capacity as well as to extend preferences. Can you give an overview of the implementation of AGOA, and likewise where we should head further down the trail, having extended that opportunity in what is the most significant trade act in terms of African countries having the ability to export and to make money on their own as opposed to being simply recipients of grants?

AMB. ZOELLICK: Well, chairman, first I want to compliment you for your leadership on this with some of my friends in the House, because I think it has been an extraordinarily important avenue of opportunity in sub-Saharan Africa. I worked with Africa 10 or 12 years ago when I was in the State Department, and coming back in this post I've sensed a whole different mood and opportunity in the continent. There are a number of leaders now who one way or another managed to broaden their education, want to try to break some of the shackles of the past, want to fight corruption, want to create economic opportunity.

And AGOA is extremely popular. I visited sub-Saharan Africa in December and I stopped in Lesotho -- the first U.S. cabinet official ever to be in Lesotho -- which sends some $350 million, $400 million of textile exports under AGOA.

Now, you emphasized the capacity-building. And one of the things that we learned along the way was that while AGOA opens up about 98 percent of U.S. markets to sub-Saharan African trade, in some areas one needs to help them be able to develop the capacity to trade. And in particular, in the agriculture area, there's a need to often meet our sanitary and phytosanitary standards.

So my office, working with AID, actually established hubs in East Africa, southern Africa and West Africa to try to be supportive of this process, and also to work closely with the business community, because the Corporate Council on Africa has been a very, very strong partner in this.

So one area of ongoing focus is to see how those hubs work and, again, to find areas where we can promote different types of sub- Saharan African exports, because, Mr. Chairman, most of the countries have focused on textiles and apparel. And that's an okay starting point, but one of the challenges that they're going to encounter and many others are going to encounter is that with the end of the 40- year-old quota system, they're going to have to compete with China and India. And that's not going to be so easy. They're going to have the benefit of lower tariffs, but they're also going to need to create more integrated operations.

And in addition, frankly, one reason they start in textile and apparels is the retail companies are backward-integrated to buy the products. They don't have to do the retailing. In other areas, that isn't the case, and we have to connect them with some of the other products.

And finally, I'd say, Mr. Chairman, we're working on a free trade agreement with the five countries of the Southern African Customs Union -- South Africa, Namibia, Swaziland, Lesotho and -- I'm just drawing a blank -- Botswana. And this won't be easy. (Laughter.) This will not be an easy agreement, but frankly, it's a way of starting to bring them up the next ladder in the chain.

SEN. LUGAR: Thank you very much for those very helpful and constructive answers.

Senator Biden.

SEN. BIDEN: Which category do you pick this time? (Laughter.) I'll tell you what, I'm glad I never had to sit in your chair.

I'd like to ask you a little bit about Russia, Mr. Ambassador. During the past four years, President Putin has reversed the course of -- in my view, at least -- democratic development and human rights in Russia. He's made regional governorships appointive positions. He's manipulated the Duma to eliminate most of the opposition. His government has taken control of nearly all the television stations in the nation.

Nongovernmental organizations have been threatened and warned against cooperation with foreign colleagues. Corporations and corporate leaders who have demonstrated any political independence have been renationalized. And on December 20th last year, Freedom House -- '04 -- announced, in its major survey of global freedom, that political rights and civil liberties have become, quote -- not quote -- so restrictive in Russia that the country has been downgraded to, quote, "not free."

And for the most part, the administration, understandably with its hands full with other things, has not spoken much about these developments. It's said some things, but appears not to be as worried about the developments in Russia and appears to believe that Mr. Putin is a close friend and a partner in some of the things we're worried about.

And my question is that in the president's talk about "Freedom is on the march," to quote George Will in one of the programs I was on with him, he said, "Freedom is in retreat in Russia."

In priorities, how high up on the scale is the concern about and the sense of a need to do something to stem this erosion of freedom in Russia?

MR. ZOELLICK: Well, Senator, in the spirit in which you -- (inaudible) -- your opening statement, let me give you kind of my perspective on what's happening. I think that President Putin came in and was worried about the disintegration of Russia. And, given his background with the KGB and other associations, I think he thought that he was going to try to strengthen the Russian state.

I think the real problem has been that he's ended up strengthening the Russian bureaucracy. And the Russian bureaucracy has a long history with its own deep traditions, and unfortunately they often include a parasitic nature and a lot of corruption.

I think, on the economic side, Senator, that there's another problem, which is I think that oil revenues in the country have misled people about the nature of the performance. As you know from your own experience, there's always dangers in a resource-based economy about it being too narrowly focused and the dangers for corruption.

And I do not believe that they've been creating a positive environment for investment, which I think they need to do. They have some very bad health problems, particularly with HIV/AIDS and some other issues.

Now, are these problems irreversible? No. But they go to the whole nature of the relationship. About a week or two ago, I was in Zurich with the economy minister, Gref, to try to work on Russia's WTO accession. And this will be a very interesting challenge over the coming months, because a lot of the actions that Russia would have to take would move and challenge some of the corruption, some of the anti-transparency, and break down some of the oligarchy.

We have seen some signs of where it's a mixed society. You do have a growth of NGOs. You're exactly right about the national media, but there's been a smaller media, often in the print media, that sort of continues to exist.

And so I think when you ask about priorities, Senator, I think this has to be an important part of our discussions with them, but we need to try to figure out a constructive way that serves the mutual interest. WTO accession would be one, and we'll see if they're willing to take on the forces of that. We have about $48 million this year in terms of helping develop, through NED and others, democracy- building exercises. And I think there's been some 55,000 people in exchanges. We need to keep that process going.

In addition, I think we've got to work with the environment around them. We've had tremendous events in Ukraine. And I think that one of the things that will eventually influence Russia is recognizing that its relations to the West -- with the United States, with the European Union, with a free Ukraine -- create an opportunity for it also to open up its society and that the future is not a creeping authoritarianism.

So I share much of your assessment, and that's at least how I would start to approach it.

SEN. BIDEN: Well, I don't want to compare apples and oranges here, but the president likes to talk -- and I think it's useful -- in broad, value-based terms about the spread of freedom, about democracies don't attack democracies, et cetera.

And I can't figure out -- and I have been one, like others on this committee, my friend on my left and my right here -- who have worked for years trying to get the relationship right with the former Soviet Union and help the end of that empire, speed the end of it, to do whatever we could to give, quote, "Russia" a chance here.

But I think it's deeper and more purely authoritarian, the instincts that Putin is pursuing, the actions he's pursuing, more than corruption, more than an oligarchy. And I was in Zurich as well -- probably you met on the way back from the World Economic Forum is my guess, and I spent some time at the Forum as well. And I had, I guess, my third meeting with a very extraordinary guy, and that was the new president of Georgia. He's very articulate, I think a democrat with a small 'd.' I think the guy really has his act together.

And all he wanted to talk to me about was why -- and he was very, very -- in what were some contentious meetings -- all my friends have been to Davos; you know, we spend all our time lately, Democrats and Republicans, pushing back the excessive criticism of the United States. And at one of the meetings with a group of Europeans, several foreign ministers and high-ranking European officials in a closed meeting where I was to speak and Senator Hatch, and there was a -- the interlocutor was the president of Latvia -- there was a lot of harsh criticism of the United States.

And the president of Georgia spoke up and said, "Were it not for the United States, Ukraine would not be where it is today." Europe was basically silent. Russia was aggressively negative. And then he said something that -- he turned to all the -- I guess I'm allowed to say this; I mean, it was a closed meeting but I don't -- let me be a little careful here. But he turned to all the Europeans assembled and he said, "And why are you silent on the occupation of my country, in part? There was an agreement signed, an agreement signed that Russia would withdraw all its troops. And all of you turned a deaf ear to me -- a deaf ear to me."

And it was a very direct and straightforward and absolutely factually accurate statement that he made. And within the OSCE -- and I know my time is up, but if I can finish this, Mr. Chairman -- Russia is using the threat of exercising a budgetary veto to weaken the organization's democracy and human rights dimension and to expand its political, military and security dimension in order to undermine NATO, in my view.

Is the administration going to do what it does everywhere else in the world? Is it going to start to talk tough? I mean, look, Iran wants to get in WTO, and they actually had a modulus that was making some progress. The senator from Nebraska and I didn't -- we raised that issue about any discussion. And here you're looking for, in China and Russia, the way to ameliorate their excesses and what in some cases is pure violation of human rights. We talk about engaging them.

But in the engagement -- with regard to any real engagement in regard to Iran or Korea -- and they're different animals -- there seems to be this we isolate to cause the fall. To quote you in a piece you wrote about North Korea back in Foreign Affairs in 2000, you said the United States must retain the initiative so that opponents are so worried about what America is planning that they cannot plot attacks or new forms of blackmail.

So is there a distinction? I mean, tell me what the philosophic distinction is here. When are we going to get tough with Russia?

MR. ZOELLICK: Well, you covered a lot of ground there, Senator. But --

SEN. BIDEN: The bottom line is, you're being silent on Russia. They're bad guys, what they're doing right now. They have troops occupying part of Georgia. They agreed to leave them. We're silent on it. We don't say anything about it. And yet we talk about engaging them in order to bring them into the WTO so they can -- I'm not opposed to that -- so they can change their behavior because they have to accommodate to that. But with the rest of the world, we don't seem to think those kinds of techniques have any value.

MR. ZOELLICK: Well, I know the red light's on. May I answer?

SEN. BIDEN: Yes.

MR. ZOELLICK: With respect, Senator, I don't think that's true. I mean, your own example of people at Davos talking about how the United States sticking up for Ukraine against Russia's action makes the counterpoint. And I've said today, very honestly, what I see are some of the problems. Those aren't complimentary terms. The president has said, when he talks to Putin, that he raises these items. I know that Secretary Rice raises them.

And so one of the challenges, of course -- and I think this is something we all struggle with -- how do you integrate the balance in this? And then how do you get operational? And again, we just have a short time today, but I was trying to outline some ways in which we have interest to work with Russia. We should have common interest with Iran. We should have common interest against terrorism. There are other challenges we need to work together on in the world.

But that should not stop us from engaging on some of the items that you've mentioned, and it didn't stop me from talking about them. Then also, however, how can we work with Russia as it changes inside? And I've tried to make some points to try to say how economic change can encourage and support that, but also some of the political organizations and some of the support, for example, NED and some of the actions to build on the civic society that is developing in Russia.

So I know you know these countries very well. There's no simple formula. It's a question of how you integrate those. And I think it's entirely appropriate to keep pressing us on the freedom issue since it's one that we have emphasized ourselves.

SEN. BIDEN: I apologize for going over.

SEN. LUGAR: Thank you, Senator Biden. Senator Hagel.

SEN. CHUCK HAGEL (R-NE): Mr. Chairman, thank you.

Ambassador Zoellick, welcome. Good morning. We're glad you're here. We are glad that you have responded to the president's request for you to continue your service to our country. Many of us who have worked with you over the years are very enthusiastic about you coming to the State Department again and your willingness to make another series of contributions to our country at a very important time, so thank you.

Your testimony, which I read carefully and then listened to you carefully, as well, this morning, noted some of the areas where you intend to take some particular initiative, and one of the areas that you focused on and noted in your testimony was China. With your background, the depth and width of experience, knowledge, and understanding of the circles of interest that intersect for our country, foreign policy being, at least in my opinion, is the arc of those interests -- energy, security, trade, economics, environment -- you are going to be particularly well suited to deal with some of these great challenges. And in that regard, as you have noted China being an area that you are going to pay particular attention to, could you develop for this committee briefly what some of those interests and opportunities are that you see developing over the next four years in our relationship with China?

MR. ZOELLICK: Well, first, thanks for your kind words as well as your friendship, Senator. The process that I refer to is one that was created by President Bush and President Hu but has not yet been activated, so I was pleased to discover it because one of the things that I felt that has been lacking in our relationship with China is some effort to try to integrate some of these items. We often deal with them in a piecemeal fashion. And so we'll see how this works. It depends somewhat on the attention that the Chinese have. They have their own stovepipe system.

But the big picture that I see, Senator, is that China is a rising force, it's both an economic force, and that will have security implications. I think, at this point in time, it's focused primarily on its economic development, and it wants a stable security environment, it wants access to energy. I think that there are -- it is in our interest to try to integrate them into both the economic and security system that we've helped develop over the past 50 years. That was part of the role the WTO accession and now the follow-through in this process. And, similarly, on the security side with, for example, the six-power talks dealing with North Korea. That's another structure that could be important in the future, and I think we may also want to look at other aspects of some of the changing dynamics in the region.

Japan is growing increasingly sensitive about the growth and power of China. This ebbs and flows in Japan. Japan is a good ally. I think, as we work with China, we need to keep a good, close working relationship with Japan, Australia, and in South Korea as well. So the main reason that I wanted to draw attention to it in my opening statement, Senator, was just to suggest that -- I know many of you have a strong interest in the topic. There are different pieces that come together. It's going to be my hope to try to integrate these a little more, and I would welcome your help and counsel as we do it.

SEN. HAGEL: Mr. Ambassador, thank you. Continuing along that line, over the years many of us here in the Senate, in particular, have been concerned about export control regime, reauthorization of our Export Administration Act, and here is my question -- how do we balance the commercial trade interests of our country with the security interests regarding export controls? I almost am daily barraged with questions, and my reading of this, and my understanding, and I've spent some time, not just here in the United States but all over the world with our trading partners. Prior to my coming to the Senate, I had a real job. I was a businessman, and I saw it then. And I think there's a very serious problem that we have in that we are holding captive our own interests; holding hostage our own security in commercial and trade interests to a very silly regime that, in fact, doesn't do what we intend to do, and I think we are undermining our interest with our allies, with our interests across the globe. Would you develop that for me and tell me how you think we should approach this? You are not exactly a bystander in this debate. You have been actively engaged in it over the last four years as you have served as our trade ambassador. But as you know, and I have said this to Secretary Rice, commercial trade interests are part of the foreign policy portfolio of this country, which you and Secretary Rice will have a great deal to do with.

MR. ZOELLICK: Well, Senator, I haven't been as closely involved with it as you have, so I'm going to just make a couple of general observations. One, the standard approach to this is to try to narrow the categories so that you can give them real protection, and this always becomes a source of great debate in the dual-use area. So what are the elements? I would lean in the direction of trying to be quite rigorous in protecting the important stuff because, particularly with changing technology, at least historically sometimes, we've been protecting things that you could probably buy in India in a stall somewhere in terms of computer power.

The second part, however, and this I'll compliment someone who recently left government. Undersecretary Ken Juster (sp) at the Commerce Department took what is a very technical area and really tried to make some significant advances by working with countries, particularly India and, to a degree, China, so that we could be certain that they tried to put in the controls and have the domestic law and the follow-up so we could expand our high-tech exports and, in the case of India, for example, we've tripled them. And one of the issues that we did work on last year was trying to strengthen China's regime, and the problem with China in this area, as in all areas of China, is not only having the legal regime but having the follow-up and enforcement.

And there have been problems with China, which both you and I are well aware of, in proliferation and other areas. So I think that, frankly, Under Secretary Juster's successor will be a very important position because, at the end of the day, this comes down to nuts and bolts and trying to make sure people put in the right regimes and enforce them, because there will always be people from the outside that want to find one incident or something and tear down the hole. So I would be pleased, Senator, to work with you on it as you proceed.

SEN. HAGEL: Thank you. My yellow light is on, and my red light will soon be on. I would end my questioning with the acknowledgement, Mr. Ambassador, of your recognition of the good work of former Secretary of State Powell and Deputy Secretary Armitage. I think the two of them did a tremendous job to advance our cause across the globe at a very difficult time in the last four years, and to hear you recognize the former secretary and deputy secretary is something, and I think it was important and should be noted. So thank you. Mr. Chairman, thank you.

SEN. LUGAR: Thank you very much, Senator Hagel. Senator Sarbanes.

SEN. PAUL SARBANES (D-MD): Thank you very much, Mr. Chairman. I want to join my colleagues in welcoming you to the committee. I share Senator Hagel's view that you have some large shoes to fill, because I think there's a general perception here that Rich Armitage did a first-rate job down at the State Department as deputy secretary of State.

I wanted to ask you about -- right off the bat, about student visas. There was a recent article in "The New York Times" -- "U.S. Slips in Attracting the World's Best Students," is its headline, and it goes on to say that this year brought clear signs that the U.S. overwhelming dominance of international higher education may be ending, and it talked about the sharp drop in the number of students from abroad seeking to come into the country. Foreign applications to American graduate schools declined 28 percent this year, actual foreign graduate student enrollments dropped 6 percent, enrollments of all foreign students and undergraduate, graduate, and post-doctoral programs fell for the first time in three decades. Meanwhile, university enrollments have been surging in England, Germany, and other countries.

Now, recently the State Department announced that it will begin seeking to extend the period of time that some students and scientists can remain in the country before they have to renew their clearances. I think this is a positive step, but how serious to you regard this problem and what more can be done about it?

MR. ZOELLICK: Well, Senator, I know that this is a topic that came up with Secretary Rice, as you probably know. She feels very strongly about it, given her role as provost at Stanford, and I think that's one reason why, quite early in the process, she took the step that she did. I share the feeling of the importance of it, because as I have mentioned in other contacts, I think bringing those students into the United States is not only beneficial today for us but pays extremely important long-term benefits.

I've talked with the secretary about some of the recommendations from the 911 Commission report, and, as you know -- I don't know the state of official-ness on this -- but the executive director of that report has been working with us and one of the tasks that the secretary and I have talked about would be having that individual try to follow through and open these issues. Senator Alexander mentioned his willingness to help from another committee's perspective on this as we drive forward.

I have learned that the numbers, I think about 573,000 last year, went up a little bit, and that's good, but I don't mean to take it for granted. And just to give credit where credit is due for some of the work that's been done, at least my information is that about 97 percent of the approvals come in one or two days now so people don't have to wait. And where you need a security check, the State Department has lowered the time from about 75 days to 14 days. But I think the key point is, for many reasons, this is an area that, working with Homeland Security, I know we want to do much better.

SEN. SARBANES: The visa determinations are made by a front-line officer at the embassy, usually a fairly new employee of the department, as I understand it. I mean, these are fairly junior people that are put into those front-line spots, is that correct?

MR. ZOELLICK: That's my understanding, Senator. It's a first post for most Foreign Service officers to be the counselor officer.

SEN. SARBANES: Well, there's a tremendous -- I think if you're a new person, and you're dealing with these security questions, obviously, I think you're going to be very careful and very cautious, and the question is, is whether the department ought to consider some process by which you can have an expeditious review of some of these instances by more senior people who are more willing to, in effect, I guess, take the risk, in a sense, if there is any risk, although I think if we run the right sort of security checks there ought not to be. But I would suggest to you, looking at the process to see if there's some way you can introduce in it to some review, which may address this problem.

MR. ZOELLICK: Senator, I've made the same observation about where the bias would be for a young officer. What I've learned, so far, is that there can be some improvements simply through the lists that people use to check the name, and that's one way we made an early improvement. But it's an issue that I plan to dig into further. I think the points you make -- I don't know the exact right answer to fix it, but I think it's something we need to do better on.

SEN. SARBANES: Well, I think it's important, because the constituency that is turned away is, in many instances, sort of the best and the brightest of these countries. So these are people that are probably going to go on to exercise -- play important roles and have influence, and I think we really need to make sure that our process is very much up to standard.

You've focused on the trading system, of course, but as deputy secretary you're going to have a much broader playing field to work on. I'm interested in your view of the importance of the human rights records of countries that we interact with and, in particular, under what circumstances do you believe that economic and trade sanctions are appropriate based on human rights performance?

MR. ZOELLICK: Senator, there is an answer to a question that I gave on this that Senator Biden had asked as part of the questions for the record, where I try to address a little bit of this, and I partly tried to give a flavor that even in my present position, there is a lot we can do and should do and are doing in terms of trying to support human rights issues. Senator Coleman and Senator Feingold were here before, but I told both of them, in the case of Hmong, that when Congress granted the vote for PNTR for Laos, I not only directed that our ambassador go in and raise the points, but I had my deputy call on the ambassador to emphasize the importance of if they wanted to have a healthy economic relationship with the United States, that they were going to have to improve the treatment of the Hmong. Now, that's just a small example of a lot of what you can try to do. It's an example, to me, Senator, that, by and large, I think it's better to try to use the economic interest to open markets and to try to create opportunities. But there are situations, and there are situations that Congress has voted for, where people do impose sanctions.

Sanctions worked with South Africa starting in 1986. You could see the difference that it made. So I really think it depends a lot on the country and their circumstances and what has been tried before. In general, I believe in trying to open up societies.

SEN. SARBANES: And how important do you regard sustainable development as an objective of U.S. foreign policy, and what do you perceive the interaction will be with USAID in addressing this question?

MR. ZOELLICK: Well, as you probably know, Senator, the term "sustainable development" has grown up over the past years and been an accepted point and principle about how one tries to not only encourage growth but sustainable growth in considerations for environmental and other issues, and I believe in general, and this is reflected in our trade agreements, that if you can encourage the rule of law and its application in environment areas, and other areas, if you can help develop civil society in these areas, they all contribute to the types of society that you would like to create. And particularly on the environmental side, there is a nice connection in that as countries become wealthier and more prosperous, the take a greater interest in these environmental issues, and so I work with AID on this as well as EPA, and CEQ and other topics. So, I think it's now been mainstreamed in terms of part of the policy, and you certainly know about the Office of Environment and Science, which has some very good quality people in it at the State Department.

SEN. SARBANES: Mr. Chairman, I know that time is up, but could the Deputy Secretary nominee address the question of the relationship between State and USAID in respect to these questions?

MR. ZOELLICK: Well, Senator, what I have seen on the reporting chart, and I believe this deals with the legislation in the '90s, is that AID has been integrated in the sense that it reports to the Secretary of State. And I noticed on the chart, you would be surprised if I didn't notice this, they didn't report to the Deputy Secretary of State. But I hope to work closely with AID and find out where that line was -- why it was drawn that way.

SEN. LUGAR: Thank you very much for making that distinction, and discovery.

Thank you, Senator Sarbanes.

Senator Voinovich.

SEN. VOINOVICH: You have responded to the president's request to join the State Department, in a very important position. We've known each other a long time, and I think that you will be a real asset to the department. For the record, I would like to bring several issues to your attention that I'm concerned about. Southeast Europe, status in Kosovo, there's going to be a meeting in Brussels coming up, and I think it's really important to the stability of that region that we make very clear that the meetings that are going to be held in Kosovo this year, wherever they're going to be held, in terms of the future of Kosovo should be on standards and not status. The president of Serbia has just visited Kosovo, made it very clear that the status talks would not be, at this time, in the best interest of everyone. And we have a fragile situation in Serbia that will be exploited if those talks turn into status talks.

Global anti-Semitism is an issue that Secretary Powell did an outstanding job in terms of recognizing, and I would hope that the office that has been promised in the legislation that we passed to combat and monitor anti-Semitism is put in place as soon as possible.

Iran, I think all of us are concerned about Iran and keeping close tabs on what's happening there, and their impact on Israel, and now, from what I've been reading, they're also trying to meddle in the situation in Iraq, and I think that's something that someone is going to have to spend a great deal of time on to make sure that doesn't unwind, and we've got to make sure that our European friends understand how important it is to their best interest as well as ours and Israel.

China, as you know, I've had a little difference of opinion with your department in terms of the relationship with China, in terms of their fixing their wan, in terms of intellectual property rights. I sometimes wonder, and I think it builds on, I think, Senator Hagel's remarks, that to a degree we may be compromising our economic interest because of the fact that China is so important to the effort that we're bringing to bring some kind of sense to North Korea. In addition to that, President Hu in China, it's a dictatorship, human rights violations are rampant, and somehow we just kind of close our eyes to all of that stuff. There doesn't seem to be anything being done about it.

Last, but not least, and the question is, you know, on the organizational chart, have people reporting to you. Undersecretary of State for management, you mentioned that in your remarks, global affairs, economic affairs, political affairs, arms control, public diplomacy, they report to the secretary through you. And you've just outlined that you're going to get on an airplane and fly around the world and see NATO people, and visit here, and visit there and so forth. The question is, who is going to run the State Department, the major management responsibility, who is going to run the shop, who is going to set the priorities in terms of where the efforts are going to be made, and make sure that the folks that are out in the field know that somebody cares about them?

MR. ZOELLICK: Senator, would you like me to focus on the last one?

SEN. VOINOVICH: I would. The last one has to do with all the other things.

MR. ZOELLICK: The Secretary is the person in charge. But, as you and I have discussed, I think one of the things that Secretaries Powell, and Armitage, and Green did a very good job of is sort of creating a team that at different levels could deal with different issues and management, whether they be in personnel, whether they be buildings, whether they be communications systems. I think the starting point is to try to get a first-rate undersecretary for management, and I actually talked to the secretary about that this morning, as a matter of fact, when we were coming up here, because we're interviewing various candidates.

But, in addition, I know that Secretary Armitage had put in some different procedural reviews that I want to take a look at and see whether I might also want to try to use because I've found at other times in my career, those can be very useful devices for keeping on top of the overall performance, and identifying issues. So, I would expect to be working close to the undersecretary for management, but also with the various line offices.

But, as the secretary has told you, she has a strong interest in these items, too. So, going back to your point about travel, I would expect that when the secretary is traveling, I'll be back, and probably vice versa. So one or the other of us will always be on the scene to try to have overall supervision.

Also, Senator, I know you had asked about management audit before, and I checked on that, and actually we can follow up with you on that, but there's actually some good news on that in terms of some of the work that Undersecretary Green did with OMB and some of the different sort of audit requirements, and the performance has improved over the past four years. So, I knew that was a particular interest, but I'll be happy to share the data with you.

SEN. VOINOVICH: Have you decided yet who is going to take over. Mark Grossman did, I thought, a very good job in Southeast Europe. Has any thought been given to who is going to try to pay attention to what's been happening there in terms of that part of the world?

MR. ZOELLICK: I have to be real careful here, in that I think Ambassador Burns' name has been sent to the committee, has it not? No? Well -- well -- (laughs.) (Aside.) It has? It has. Nick Burns, who is our ambassador in NATO, and who Secretary Rice worked with in the NSC, and actually was my assistant at the State Department starting out, is being courted by the president for the undersecretary for political affairs. So that would be Mr. Grossman's position. In terms of the overall responsibility, that would be a natural location, but I haven't had a chance to talk about that with the secretary.

SEN. VOINOVICH: Well, Mark really spent a great deal of time on it. And I know Secretary Burns quite well because I also worked with him on NATO expansion. He's an outstanding individual. I'm glad to know that he's the one that will have the job, because I've got a relationship with him. Would you like to comments about my comments about China, and are we walking on eggs over there?

MR. ZOELLICK: Well, you and I have had a chance to work on this, particularly in the intellectual property rights area, which is one of the items you highlighted. I think that is the number one item on our agenda. And before Secretary Evans left, he took a trip to China to set up another meeting of what is called the JCCT, which Secretary Evans and I chaired last year, which I think was a very useful device. We got resolution of a whole series of issues, some in agriculture, some in high tech standards. We made a start in the intellectual property rights area where they lowered the basis for penalties, increased criminal penalties, increased the enforcement effort, but I still think it remains an enormous problem.

Now one issue that we talked about that the administration developed last year was the STOP initiative, which is the one dealing with a particular type of counterfeiting, and that's one that I hope in a second term we can work with other countries. The Japanese were just in my offices yesterday. I talked to Peter Mendelsohn, the European Trade Commissioner, because to make the counterfeiting part work well, we need to do it with other countries.

On intellectual property rights more generally I want to just identify for those of you that have an interest in this, to try to give us some additional information and leverage. About three months ago my current office, USTR, put out a notice in the Federal Register, sent letters to every member of Congress asking companies to provide us evidence of intellectual property rights violations. And we know this is a sensitive matter, but we promised to keep business confidentiality.

Now, one reason we want to know this, Senator, is that some people talk about the possibility of a WTO action, if necessary, to put pressure on China. There is a standard called effective enforcement required by the WTO rules, but it's never been tested. And one point that I feel quite strongly about is, if we're going to test that language for the first time, I'd like to make sure we've got good evidence for the basis of a case. And so for you and others who hear a lot about this, I hope we can get some of the information, because from the copyright industries, we've gotten some very good information recently, but from a lot of other sectors, the response has been less than deafening.

And so if we're going to work on this, we actually need some of the evidence we can use. Where there are particular cases, some with pharmaceutical companies, one with GM that's well known, we work on them individually to try to make sure our interests get represented.

SEN. VOINOVICH: Thank you. I just would like to make one point, and that is that you ought to know that I have written to the Chamber of Congress in Ohio, the manufacturer's association and said, you've been complaining, and complaining, and complaining, let's come up with the cases so that you've got some of this evidence that we need, and they haven't been as forthcoming as I'd like them to be. And I'm working on it.

SEN. LUGAR: Thank you very much, Senator Voinovich.

Senator Dodd?

SEN. CHRIS DODD (D-CT): Thank you, Mr. Chairman. And Mr. Chairman, I would ask unanimous consent that opening comments about the nominee be included.

SEN. LUGAR: Those comments will be included in full.

SEN. DODD: Let me first of all commend -- (off mike.) I have high regard for Mr. Zoellick. We've known each other for a number of years, going back to the early 1980s, and I think the country is fortunate that he is willing to take on this responsibility. We're going to lose you in the trade office, unfortunately. But, my hope is in doing this job, you'll be able to bring that experience to the department and have some strong effect on some of these trade agreements that are still lingering out there. So I intend to support this nominee. I think he's a great one. And I look forward to working with you.

Let me raise a couple of issues. Your presence here obviously gives us an opportunity to talk about some questions presently before us. You may not have seen, there was an article in today's Washington Times dealing with Darfur. The headline was "Has Bush Forgotten Darfur?" And it goes on to recite the list of atrocities, the 300,000 people who have lost their lives, the 10,000 a month that are being annihilated. It goes on to describe the U.N. report, quoting the report, of killing of civilians, torture, and forced disappearances, destruction of villages, rape and other forms of sexual violence, pillaging and forced displacement. And this is all being, they say, the attacks are deliberately and indiscriminately directed against civilians by the government. And it goes on to describe how this doesn't qualify to the definition of genocide.

We heard, of course, Secretary Powell describe it appropriately as being genocide without any question at all. My question is this, it has to deal with how this is going to be handled. I know the administration's long-standing opposition to the use of the International Criminal Court, and walking away from that proposal. The Sudan is not a member of the ICC and therefore before they can be brought before the ICC, a U.N. resolution would have to be passed. This is one of the points that we insisted upon during the negotiations with the International Criminal Court, that if you're not a member of the ICC, they couldn't just bring you to court without a U.N. resolution. So the safeguard we insisted upon is working, I might point out as an aside.

What is troubling to me is that we're suggesting, based on these articles, that we revive the ad hoc tribunal used in Rwanda, as a way of proceeding with the case of the Sudan. As I understand it, that tribunal -- one, I find it somewhat ironic, because simultaneously we've also been calling for the dismantlement of that tribunal, that ad hoc tribunal. But, the cost of doing that would be roughly $100 million, presumably solely borne, I gather, by the United States, whereas going through the International Criminal Court, even given the fact that the U.N. commission does not properly define these events as being genocidal, it seems to me that may be a wiser course to follow. What is the position of the department? Are we going to veto the U.N. resolution when it comes before us to allow the atrocities to be brought before the ICC or not?

AMB. ZOELLICK: Well, senator, what I saw in today's paper actually was, as you might have seen, was that the U.S. has actually been trying to push a resolution on Darfur, including expanded number of peacekeepers. And, as you know, the main problem in that has been some countries that have disappointed all of us in terms of moving forward with a resolution.

As I understand it -- but this is what I just read in the paper this morning, the section in terms of the tribunal has been left open. Now, I've talked with various officials to try to understand what's been developed, and the concept that we've been working with is one that I do think is important for the long run, which is try to develop African Union capabilities. One of the things we were talking about earlier under AGOA was the role in Africa of developing their own institutional processes. I might put a little footnote here: I think this is going to be a bigger issue in terms of military capabilities in Africa, and perhaps some that use some new methodologies, to try to deal with future problems like this. But in the legal structure, at least the reports that I've gotten, senator, is that there has been some interest in African countries. I haven't heard the cost estimate that you heard. It may be the case, but I haven't seen it -- and that Tanzania has done a good job in terms of the Rwanda tribunal. And it would at least be my inclination, senator, is that where you can develop effective tribunals that in a regional context that develop some of their capacity, that would be the preferable way to go. I mean, you've seen this in the Western Hemisphere, how it's important to try to develop local institutions and structures.

So I don't know yet whether it's possible. I don't know the full degree of support. But I did get a report that there has been some interest.

SEN. DODD: But my question is: Are we planning to veto the resolution on that basis?

AMB. ZOELLICK: Well, first off, I don't know if there's a resolution that requires it. As I said, the only resolution I know of is one the United States pushed this morning, and it looked like it was an open question.

SEN. DODD: Well, I'd be interested in following up with you on this, because I'm told that that is the resolution and the reports are that we vehemently agree with the ICC handling this case. I'd point out to the irony in a sense that it's been our position -- been highly critical of the Rwanda War Crimes Tribunal -- the Bush administration has. And the idea that we're going to revert to that, something we're highly critical of as a way of handling these matters seems to be going the opposite direction, particularly if we're bearing a cost of $100 million to pay for that. And, by the way, the $100 million cost is the report out of the State Department -- I didn't make up the number. It's from the report --

AMB. ZOELLICK: I didn't say you did. I just said I hadn't seen the number.

SEN. DODD: Now, the Europeans and others, by the way, are strongly urging us to go in that direction. I'd do a follow up on that -- I'd be interested in how that would work out.

The second question I want to raise with you quickly here if I can has to do with the issue of job loss. And utilizing your experience, your background as the U.S. Trade Representative. I know you're familiar with a process called offset arrangements. Let me just explain what it is to my colleagues and others who may not be as familiar with it. This goes back to the postwar period when we were trying to help -- the language talks about "war-torn" Europe -- and that is saying -- allowing countries there that would approve of defense contracts in the United States to offset the cost of those contracts by insisting that sub-contractor work be done in the country that has accepted the contract. There are several nations, like Holland, which insist upon 300 percent of the value of the contract as part of the offset agreement, Belgium -- the average is around 100 percent of the value of the contract. Senator Shelby and I, along with others last year, wrote an amendment to the Defense Production Act, asking for there to be a study done by a joint commission made up of the Department of Defense, the State Department, the Commerce Department, to analyze what is going on. The Department of Commerce says we're losing 10,000 jobs a year as a result of these offset arrangements. We require nothing like that in the United States -- nothing like it at all, and it's of deep concern to us that there's been nothing done, no reports at all made by this report that we -- it was modified. Our amendment actually was a stronger amendment, but during the conference report there were those who asked us to modify the amendment, so we did by just asking for a report to be done by this joint commission to -- an interagency task force I should say, including the U.S. Trade Representative, secretaries of State, Defense, Commerce and Labor to develop U.S. policy on how to mitigate foreign offsets. The law required that a report by this task force be provided to Congress months ago. We've never heard a word on any of this. Do you know the status of this and why we haven't?

AMB. ZOELLICK: I don't, senator. And why I really haven't been a part of the defense trade, I'm afraid I don't have much expertise on defense offsets. I do know a little bit about the economy of the state of Connecticut, so I will be pleased to follow up on this and try to learn its status.

SEN. DODD: Well, I wondered if you would, because your office as well, USTR, was involved in this. Did you ever hear anything about this?

AMB. ZOELLICK: I've heard generally over the years about defense offset trade, but I keep a pretty close watch on what goes on there, and I have not heard, no.

SEN. DODD: Well, I'd like it if you could get back to us on that. This is a -- we're going to raise this again. It's an important concern obviously with 10,000 jobs being lost on offset arrangements that are just done primarily to reward these countries for -- at a time when it's hard to make a case that they need this extra economic lift provided to them, when you consider as well we do nothing like this at all in a reciprocal arrangement.

AMB. ZOELLICK: I wrote it down, senator. I'll make sure I check.

SEN. DODD: Thank you. Thank you, Mr. Chairman.

SEN. LUGAR: Thank you very much, Senator Dodd.

Let me mention that Senator Coleman is unable to attend today's hearing. He's chairing a hearing on the oil-for-food problems in his capacity as chairman of the Governmental Affairs Subcommittee. Senator Coleman has asked me to submit questions for the record, in which I will do, and we will ask with regard to these as well as other questions that might be submitted within the appropriate time frame for you to respond, sir.

AMB. ZOELLICK: Pleased to do so.

SEN. LUGAR: Senator Allen.

SEN. ALLEN: Thank you, Mr. Chairman. I'm pleased the president has once again called on Ambassador Zoellick to serve our country. And he has an outstanding record, which has been brought up on a bipartisan basis here.

I'm sorry I had to leave to give -- -- I'm co-chairing a civil rights pilgrimage to Alabama, and we had a press conference with John Lewis, and it's a bipartisan, bicameral effort. And it does strike me that what we see looking at our own history on civil rights and making sure that all people have equal opportunities to compete and succeed regardless of race, religion, ethnicity and gender, is what we're trying to advance throughout the world. Ambassador Zoellick has been involved on the economic front in trying to make sure there's that economic freedom. I'm glad to see that so many of my colleagues brought up human rights, whether that is Senator Sarbanes and Senator Voinovich and I'll not get into all of those.

But I'll say this, Mr. Chairman. I just came back from Iraq this last weekend, as well as Israel, meeting of course with our troops who are the best of our country in Iraq, but also with Dr. Jaafari, who heads up the Dawa Party, the winning coalition's -- part of that winning coalition's slate -- and talked to him about what we consider to be the pillars of freedom, similar to what we went through in discussions with Dr. Rice's confirmation hearing. The pillars being: number one, freedom of religion; second, freedom of expression; third, private ownership of property; and, fourth, the rule of law. At least those are my four pillars for a free society.

In Iraq, listening to Dr. Jaafari, there was agreement on that. The issue, which is where I think you're going to be helpful in both of these areas, is that economics do matter. I had suggested to Dr. Jaafari, who is going to be part of that winning -- whatever his position is -- presently he's vice president of the interim government -- we don't know where he'll be in the ministry -- the concept similar to what Alaska has with Alaska Permanent Fund, where every resident of Alaska gets a dividend check every year. I suggested to him that might be a good idea for Iraq, where every citizen gets a dividend check, and the oil is in the north and it's also in the southern part of the country. Number one, it would be a national effort, national asset. People would be getting maybe a few hundred dollars a year. They'll care about upgrading their system. But the other thing is that as there's another pipeline getting blown up near Kirkuk, they're going to care about these terrorists blowing up the pipelines, so that's money in their pocket being lost because of these terrorist activities.

The same applies -- and I'm going to ask your views on this -- in Israel. Meeting with Prime Minister Sharon, Minister Netanyahu, as well as the Labor leader, Shimon Peres -- there is a ray of home there that they can deal with Mahmud Abbas or Abu Mazen. Shimon Peres is talking about, Let's get tourism, let's get more investment into the Palestinian territories, that it's very important. You as ambassador -- we have free trade of course with Israel. We got through the Jordanian free trade agreement. That's another area where there could be a convergence of people's rights and civil rights, so to speak, but also the importance of those property rights.

And so I'd like to hear from you, Mr. Ambassador -- and you know that Iraq and the Israel-Palestinian issue are the two forefront issues, as well as of course Iran, of course North Korea and also of course protecting intellectual property rights in China, who cheats on a variety of fronts, and you've helped in the past on their semiconductor unfair taxation, addressing that as well as South Korea on the DRAM chips. But I'd like to hear from you, Mr. Ambassador, how do you see in Iraq, in Israel, Palestinian areas, as well as China, how you see the advancement where your expertise is outstanding and commendable, how do you see that converging with also our security interests in these troubled areas where we're trying to make sure that the citizens not only have freedom, but also that the economic activities, which come along with free societies?

AMB. ZOELLICK: Well, thank you, senator. And as a resident of Virginia, maybe we could get one of those Alaska programs for us too. (Laughter.)

SEN. ALLEN: We don't have much oil in Virginia. We do have severance taxes on the coal for the coal field areas.

AMB. ZOELLICK: Just thought I'd try. Well, your larger point is one that I know the president and the secretary feel is very important, and I hope I can add some other perspectives from my past background.

I wrote an op-ed about 10 or 11 days after September 11th, and it stirred a little controversy in some quarters. But the point that I was trying to make was the importance of open markets and trade in the long-run war against terrorism. And part of it is the points I was talking about a little bit I think with Senator Biden about, the open societies and the rule of law and transparency and fighting corruption. But equally important, while I don't believe that poverty causes terrorism -- and if you look at the demographics, you have a hard time making the case -- it is certainly the situation that where societies lose a sense of hope, where people don't have any sense of opportunity, these are fertile grounds, whether they're in Indonesia or in the Palestinian territories.

To take the case of the Palestinian territories, they are now covered under our free trade agreement with Israel. And so one thing one would want to do, if you move toward a two-state solution, is make sure they don't lose that. They haven't been able to take full advantage of it yet, but I've met some Palestinian entrepreneurs who regularly come through, and frankly the business spirit that you encounter in a lot of the people is really extraordinary.

Now, the security environment has to change. And right now, as you know from being there, I think we also have to try to make sure that there's some money that gets pumped in, whether it be in construction or housing or other aspects, so that Prime Minister Abbas can start to show that he can deliver. He has the legitimacy of the election now. He needs to build the authority of a prime minister, and that includes attacking corruption, the security issue, and frankly also I think the economic dimensions. I know the World Bank has been helpful on that, and I know that that is part of the effort that the president put forward in the supplemental.

In the case of Iraq, I talked to Ambassador Negroponte yesterday, and I know from your hearing with Secretary Rice there was a lot of focus on getting some money flowing quickly to their parties, which I think is important, but I think we need to blend it also with making sure that you do build the structures for the future, including you mentioned the energy one, whether it be oil or electricity. So my own view is economic power is a very important component of America's power. Economic dimension motivates an awful lot of life that I've seen around the world. Economic freedom is linked to political freedom. So how we integrate those can build on some of America's values and its interests.

SEN. ALLEN: Thank you, Mr. Ambassador. My time is about up. One other area that we'll need you to -- and I very much agree with you, and that's why I think you're a perfect person to be in this post at this time as we advance all these concepts of freedom.

Finally, on China, China, which as you well know is just constantly cheating on a variety of things. (Bell rings.) Time's up. Please understand I'll be with you trying to ride herd on them, and this committee has made an extra effort to put more funds in to these countries to make sure that our intellectual property rights are protected. That's everything from computer software, to motion pictures, music and so forth. But China just cannot continue to take this valuable intellectual property from our innovators and creators here in this country.

AMB. ZOELLICK: Chairman, if I could just have two second. Senator, I know we've worked closely on this, particularly given the high-tech community in Virginia. There's another issue, a related issue, that we need to focus on, and again I will try in my new post to help support my current post, and that is the setting of standards. One of the things that we worked closely with the industry last year on was setting standards in some of the 3G wireless area and some in the WAPI, the Internet protocols. This will be an increasingly important issue with China, because they're big enough that they will be tempted to say, Well, we'll develop our own standards. Frankly, I don't think that's in their own long-run interests, because if they want to sell to the world, they've got to operate on international standards. So in addition to intellectual property protection, which we talked about with Senator Voinovich, I think this issue of standards development sounds very technical, but is going to be very important.

SEN. ALLEN: Sure is. I look forward to your confirmation and to working with you. Thank you, Mr. Chairman.

SEN. LUGAR: Well, thank you very much, Senator Allen.

Senator Feingold.

SEN. RUSS FEINGOLD (D-OR): Thank you, Mr. Chairman. Congratulations, Ambassador Zoellick. I have enjoyed working with you, and especially enjoyed our very good meeting last week, and look forward to many more good meetings.

Let me get right into questions. And I'm so pleased to hear that Senator Dodd already discussed some aspects of the Darfur situation. The administration has worked very hard and it's achieved obviously real success in its efforts to end the devastating north-south conflict in Sudan, and I do applaud that achievement. But in the meantime a crisis has emerged in Darfur that has raged for over a year, and frankly shows essentially no signs of abating. And the administration has been vocal in condemning those who created this manmade disaster. U.S. policy has actually, however, failed to stop -- actually utterly failed to stop what Secretary Powell called genocide. The administration has been particularly ineffective in its effort to rally a multilateral coalition to bring real pressure on the government of Sudan.

On a trip a few weeks ago, I met with refugees from Darfur who were in Chad, and their assessment in my meeting with them of the African Union effort to date corresponded to what we hear from most credible international observers; that what has happened is simply nowhere near enough.

So while we applaud the AU effort and want to strengthen it, we cannot continue to simply point to the AU as if the AU, which is a very young institution with a very modest capacity so far, as if somehow they can handle the whole situation alone.

The evidence to date suggests that it cannot -- and we would actually have a good chance of compounding the tragedy in Darfur if we also set up the AU to fail as part of our response. So I'd like to ask you in your view what new direction is the administration going to take? What new diplomatic efforts is the administration going to meek in this area to ensure that our Darfur policy becomes more effective?

AMB. ZOELLICK: Well, senator, since I'm not yet in the position, I can only give you sort of my inclinations as I approach this. First, I had a long conversation with Chairman Frank Wolf, who you know has focused very hard on this issue. He and I worked very closely together. He was my appropriator, so we worked together particularly closely. And I think one starting point actually is where you began with the north-south conflict. There's an agreement, but that has not yet been implemented. And so one of the things actually that the State Department has just done -- and Chairman Wolf and I talked about this -- is send out a charge d'. We didn't want to have somebody that recognized the government, but we wanted a higher level official to focus on the implementation of the agreement. Now, the reason why is that there's aspects of the implementation of that agreement in terms of creating a national unity government that I hope might be actually useful in changing the government's attitude towards Darfur. So that's at least one element that I would like to try to explore.

The second is that in terms of strengthening the peacekeeping force, as I mentioned to Senator Dodd, I just saw this morning the request to try to increase it to 10,000. My understanding it was about 3,300, and only 1,100 had actually gotten into place. I will say to all of you -- because I encountered this on the House recently -- part of the president's request for a supplemental appropriation includes some money for this. And I mention this because sometimes I know members find it a hard time to vote for just general peacekeeping. Please recognize a good chunk of this money is to go for Sudan and Darfur. So if that's an issue of concern to members, I hope they would be willing to support something that is otherwise labeled peacekeeping.

And in terms -- I talked a little bit with Senator Dodd in terms of the war crimes aspects and whether develop an African Union tribunal or sort of the role of the U.N. As you know, part of our problem in this -- and I think this is a good reason why pushing the issue in the U.N., is that it's been held back by some of the other members of the Perm 5, as we have encountered in the past. And I think we partly need to draw attention to that, and show that there have been genocides taking place, and people are turning a blind eye to it.

I'll make one more -- and so part of this, senator, is it's a darn difficult problem. I don't know for sure how we're going to try to solve it. These are some initial ideas. But I'll tell you one other thought that I've just been having, and that is I do believe, as I mentioned to Senator Dodd, it's important to develop regional capabilities. And I think one area that I would like to look at further is what we can try to do not just on the court side but in terms of the military side with AU capabilities. If these problems are going to happen again -- and I sadly have to suspect that they might -- and if we don't want to necessarily put in our forces, then we're going to need more capable African forces. And frankly, you know, I've gotten to work with and know a lot of the African leaders. I appreciate the contributions Nigeria, Rwanda and others have made.

But there has been some thinking about how, with the right types of training and technology, that a smaller group, using sensors and other issues, might actually be able to be more effective. So that's another area that --

SEN. FEINGOLD: Let me say that I respect that I do believe in efforts in that area. But I just want to be clear for the record, I don't think there's any talk of 10,000 for the AU force. I think the 10,000 relates to the north-south peacekeeping. So the figure of 3,300, I think, is sort of the up side. And I think you're right, that there's only about 1,100 of the AU's. I just want to be clear on that.

The other thing I want to reiterate is my feeling that the administration ought to appoint a high-level presidential envoy to try to marshal the international coalition. We had Secretary Danforth do an excellent job as a special envoy with regard to north-south agreement. Many of us believe that this crisis, which needs immediate attention -- we can't wait for the AU to develop in a way that would allow it to completely handle the situation -- that the United States should appoint a special envoy to deal with something like this when our own secretary of State has called it genocide.

And that would lead just to a follow-up question. I know it's difficult to get the other countries in the Security Council to go along with us on this. I'm just wondering why we believe that at this point the efforts we're making now on the Security Council will be any more successful than they have in the past, because they haven't been very successful.

MR. ZOELLICK: Well, on your second question, I think, in general, part of the nature of diplomacy is when you run into resistance is not necessarily to stop but to try to highlight for other parties, and in this case world opinion, about what's happening when certain countries block the issue, and then try to use the facts on the ground to justify additional action.

Now, I don't know whether it'll be effective, but probably you and I would agree that just sitting on our hands isn't necessarily going to take the action either. So sometimes it's a combination of your public diplomacy, your role in the U.N., what you can do with regional groups. And I will look into your question about the special envoy, Senator.

But, you know, I also will be honest with you. It's a tremendously difficult and challenging problem. But I will just share with you the sense that I feel seized with it, too. I think it's just a terrible outrage and it's a spot on the global community of what happens there.

SEN. FEINGOLD: I just have a few seconds and I wanted to ask you about the reports from the special inspector general for Iraq and the very disturbing stories about money that may have been improperly used. How can we ensure that the U.S. reconstruction efforts in Iraq contribute to a culture of transparency and accountability rather than a culture of corruption? Because, I'll tell you, the headlines today are not pretty.

MR. ZOELLICK: Well, I think the first step is that if it relates to our own operations in any form -- and I only know what I saw in the newspaper -- you have to investigate them and pursue them to the end to find out what's gone wrong, and if somebody has gone wrong, that you take action against the wrongdoers.

I think, more generally, what I hope we can encourage in the development of the new political system in Iraq is a more transparent rule-of-law system. I've talked about that more generally, because I think, frankly, shining the light of public awareness in a system where everybody knows the rules is probably the best way to combat not only corruption, but frankly the control of a small group of people that often stops other people from having a chance in society.

SEN. FEINGOLD: Thank you, Ambassador. Thank you, Mr. Chairman.

SEN. LUGAR: Thank you very much, Senator Feingold. Senator Murkowski.

SEN. LISA MURKOWSKI (R-AK): Thank you, Mr. Chairman.

Mr. Zoellick, thank you for your time here this morning, and I look forward to working with you in your new capacity.

My question this morning relates to China and the relationship with Taiwan. China has proposed the anti-secession law that would unilaterally change the status quo between -- on the China-Taiwan issue. And it has long been the stance of the United States that Taiwan and China should mutually reach a peaceful resolution of the Taiwan issue. And I would like to know your thoughts on the impact of the anti-secession law and its relation to our obligations to Taiwan under the Taiwan Relations Act.

MR. ZOELLICK: Well, as you said, Senator, our goal is for the parties to work it out peacefully, in an acceptable way to people on both sides of the strait. And in that sense, we encourage a dialogue and we certainly discourage actions like that that move in the other direction, with the anti-secession law.

And there have been some steps between China and Taiwan recently in terms of transportation links and others that I hope will move in a positive direction. But as you know, we retain the one-China policy and the three communiques that we also -- and the president is committed to the terms of the Taiwan Relations Act.

SEN. MURKOWSKI: There's been a fair amount of conversation this morning about Russia and some discussion about the application to join the World Trade Organization. I understand that the bilateral talks are ongoing. But one of the issues that I would like to focus on is Russia's domestic natural-gas pricing.

We have a company in Alaska. Right now they export ammonia and uria used in fertilizers throughout the Pacific Rim. They've been in business for about 30 years now on the Kenai (ph) Peninsula and have been very successful at what they've been doing. Of course, natural gas is the key component in this manufacturing process.

This company is going to be shutting down now after 30 years because it can no longer compete with the subsidized low-price competition from Russia. So we've got really the number one employer there on the Kenai (ph) Peninsula that is shutting down. They've been the backbone of this economy, and they're quite possibly no longer going to be around.

Now, Russia's laws requiring gas pumps sell natural gas to domestic industries at below-market prices, regardless of profitability, while selling to foreign markets at prices five times higher doesn't allow for American companies to produce products requiring natural gas, like the fertiziler, to compete on the global marketplace.

And we recognize that the EU and Russia reached a side deal on Russia's energy policies, but that agreement has been kept secret at Russia's request to help it through these negotiations. And it's probably too late for this company in Alaska that's going out of business, but I guess I'd ask you to look down the road. What does it mean to other U.S. businesses? We don't want to see others in the same fate that Agram (ph) is now going. What's the status of these talks? Where are we at in getting Russia to adopt market reform principles as it relates to its domestic natural-gas policies?

MR. ZOELLICK: Well, Senator, I've actually met with the representatives of the fertilizer industry, because, as you properly pointed out, what they learned about the EU-Russian bilateral agreement left them anxious about the specificity in terms of building in the full costs for raw materials for fertilizer.

So it is one of the prominent issues on our agenda. And indeed, I raised it with Minister Gref when I met him about 10 or 11 days ago and saying that we have to have a system as part of this to make sure that whatever their internal price system is, that if it's going to be competing with a product like fertilizer, we've got to make sure that the raw material includes the full cost basis for that. And so that is one of the items that we'll be pursuing, and we'll be pleased to continue to work closely with the industry. They're in very close touch with my office now, so I suspect they even know about the work we did in the past 10 days or so.

SEN. MURKOWSKI: I think this is going to be important to all of us as we work through on some of these energy issues, so I appreciate your attention to that.

Thank you, Mr. Chairman.

SEN. LUGAR: Thank you very much, Senator Murkowski. Senator Nelson, I thank you for your patience.

SEN. BILL NELSON (D-FL): Yes, sir. Thank you, Mr. Chairman. Well, I'd like to bring our discussion back to the Western Hemisphere. I enjoyed our discussion privately, Mr. Ambassador. And I'd like to start by quoting you an article in Foreign Affairs in the fall of 2000.

Quote: "With Latin America in particular, the United States has resumed its old bad habit of overlooking its neighbors until problems compel it to pay attention." And you go on from there to give some specific examples.

Let's talk about Haiti. Haiti for 200 years has continued to be in a spiral down. What are we going to do? One of the things that I suggested to you privately was to take Senator DeWine's bill, the HERO Act, which would allow Haiti to bring in textiles, as we approved in the sub-Saharan Africa bill -- bring in textiles, manufacture them, and export them duty-free to the United States.

If we can do it for sub-Saharan Africa, why can't we do it for the poorest nation in the Western Hemisphere, whose economic and political condition has a profound effect upon the United States, and particularly upon my state? What do you think?

MR. ZOELLICK: Well, first, I think, as you and I discussed, the starting point, before you get any business there, is to make sure the security situation is conducive to that. And you and I talked a little bit about the peacekeeping operation. I spoke to the Brazilian foreign minister, since the Brazilians are in charge of this, since he's also the trade minister.

SEN. NELSON: But we also discussed that long-term security isn't going to cut it if we don't have some kind of economic activity.

MR. ZOELLICK: Right. And I was just going to make the point that I think we need -- after you and I talked, I tried to find a little bit about where that stands, and I'm modestly encouraged, but recognizing that Haiti has a very long and tragic history from both natural disasters and human ones.

On the economic side, I'll tell you, the best thing that Congress could do in the near-future would be to pass the CAFTA-Dominican Republic free trade agreement, because there's about a million Haitians working in the Dominican Republic. And so that'd be the fastest way to make sure that we don't lose jobs and create jobs (to go back?).

On the third point, on the HERO bill, I think, frankly, Senator, I live in a world of trying to get things done. And I think that what we will find is that there's some appetite in both the House and the Senate for a version of that bill. Whether it be the exact version that Senator DeWine had, I don't know. All of you know; everybody's got their own sensitive issue. If I talked about a sugar bill with you, you'd be a little anxious.

And so I think, you know, the administration has been interested in trying to work with the House and the Senate to try to put something together there.

I will point out that Haiti now benefits from a role in the Caribbean Basin Initiative. And the reason it's a little different than Africa is the only difference is it has to use yarn and fiber from the United States. Well, that's a little easier to do if you're in Haiti, because that's what the Dominican Republic does and that's what Central America does.

And I think the worries of the textile industry will be that there's about $500 million of exports of that that could go away to China or somebody else. So that's the issue we'll have to try to work on. But as you know, I agree with you, you have to create economic opportunity there too.

SEN. NELSON: Well, I want to thank you for your attitude. I think it is a receptive attitude. I certainly did not get this when we questioned Dr. Rice. And I thank you very much.

MR. ZOELLICK: Well, then, I'd better be careful, but I'll look at what I said. (Laughter.)

SEN. NELSON: Well, you evidence an attitude of being able to look at something. And if we're going to do anything about Haiti -- and Lord knows we need to, and so do the other nations of the Western Hemisphere, as well as some European powers such as France -- we need to do something for that country. Otherwise it's going to continue to go on as it has.

The chairman of this committee is presently conducting an investigation by asking the GAO to examine our posture of oil importation from Venezuela. And aside from the rhetoric that we hear, the rhetoric particularly from the president of Venezuela, we have to start facing the reality that it is possible that there might be negotiations going on right now between Venezuela and China for China to construct refineries, the kind of which we have on our Gulf Coast of the United States, that can refine the grade of crude oil that comes out of Venezuela.

We import 13 to 15 percent of our daily consumption from Venezuela. We'd have a little lead time because you can't construct these refineries overnight, but they could be done within a reasonable period of time. Give us your thoughts of what such a prospect of cutting off that oil to the United States would do, and what would we do about it?

MR. ZOELLICK: Well, first, Senator, I remember you going into this in the transcript, and actually I had learned from your answer because I hadn't focused on the types of refineries and the grade of the oil. I'll be interested to see what the GAO report suggests.

I'll tell you my own sort of general impression. The oil market is a world market. So this idea that you're going to be able to send oil to one place and it's somehow going to stop it coming to the United States, I don't understand economically. It's a commodity market.

So, frankly, if they're sending that to China, which frankly will cost them a lot more and somebody's going to have to invest in the refineries, well, then there's going to be other oil that China otherwise would have used that would come to the United States. So I'll be interested to see how the GAO does this, but that would be my understanding of how the world commodity market works.

SEN. NELSON: Well, if it's a fungible item in a world market that easily flows, I would agree. But if you suddenly had cutting off 15 percent of the oil coming into this country, we'd be scrambling, and thanks to the chairman, he's getting ahead of the curve because the United States may be faced with this possibility. Thank you, Mr. Chairman.

MR. ZOELLICK: And, Senator, that's where the contributions that I know haven't been easy for the Congress for the SPRO are a very important investment.

SEN. BIDEN: Mr. Chairman, could you yield to me for 30 seconds, because I have to go to a subcommittee, and I don't want to take the time from my friend from Illinois, but, Mr. Ambassador, I hope that -- you wrote a significant article in the Republican foreign policy campaign 2000 in the foreign affairs in 2000. It's a really well- written article.

MR. ZOELLICK: It hasn't got as much attention because there was a companion article by someone named Secretary Rice. Hers is the one that's always quoted, but I appreciate --

SEN. BIDEN: Well, I hope yours is listened to, because the Republican foreign policy you lay out here bears very little resemblance to the Republican foreign policy that's being pursued now, in my view, and I didn't want to ask you questions of this, because I didn't want to play the "gotcha" game. It would come off the wrong way, but at some point I'd like to talk to you privately about this article. I think it's well-written, some parts I disagree with, but it bears little resemblance to what's going on now, and I hope they knew what they were picking when they picked you -- or I hope you still believe what you wrote when you wrote it. Thank you.

MR. ZOELLICK: Thank you, Senator.

SEN. LUGAR: Well, thank you very much, Senator Biden. I'm confident the president did know what he was doing when he nominated Ambassador Zoellick. (Laughter.)

SEN. BIDEN: If not, sneak up on him. (Laughter.)

SEN. LUGAR: Thank you, Senator Nelson, likewise. Senator Obama -- the record shows Senator Obama was here at 9:30, promptly heard the original testimony in full, and we appreciate your returning for the questions.

SEN. OBAMA: You are very kind, Mr. Chairman.

SEN. BIDEN: You'll learn to have a greater respect for seniority in about 10 years. (Laughter.)

SEN. OBAMA: I appreciate you allowing me to come back. I am very apologetic that I missed most of the questioning. My staff kept terrific notes, and I'll try to get the transcript. So forgive me if I end up being a little bit repetitive. I was trying to review to see what had been covered and what has not.

One area that I think has not been covered, if I'm not mistaken, was the issue of North Korea, and so I was wondering if you could share with us your thoughts -- we had a briefing last week in which there was guarded optimism on the part of this administration with respect to the six-party talks. The very next day North Korea announced that it was pulling out of the six-party talks and had nuclear weapons, not a surprise to anybody, but certainly didn't seem to encourage much optimism.

I'm interested, I guess, in two issues -- one, your assessment of the role that economic incentives as opposed to security concerns may play and ultimately bring in better resolution and, secondly, given your experience with our trading partners in Asia -- China, Japan, South Korea -- what role you think we can play in managing or encouraging them to help us resolve this situation?

MR. ZOELLICK: Well, first, Senator, I'm not in the day-to-day flow on these issues, but I'll be pleased to give you my assessment. I've obviously been giving it substantial thought, too.

I guess the first point I'd make is I would be careful about reading too much into the North Koreans most recent statement. It's, as we know, it's an extremely opaque society. That could have different messages. That could have been, as they've done in the past, sort of a demand to get additional compensation. It could have been pounding one's chest before one makes a move to show the domestic audience as being tough. It could have been something related to the fact that the Chinese were scheduled to come, and they partly have played a key role in terms of economics and assistance.

So my view is, under any of those scenarios, and in some sense it doesn't matter which one guesses, it important for the United States to stay constant with the core strategy here, and the reason that I think the six-power focus has been important goes to some of the points that you related here.

All the other four parties, other than North Korea and the United States, have a very strong interest in pressing North Korea on this negotiation. On the economic side, Japan has been considering actions separately to deal with insurance requirements for its ships coming into its ports that could have a very significant effect on North Korean shipping that comes out. China, as I referred to, has been a major source of assistance and support.

So the proposal that the United States put forward in June was work with our allies and was a basis to try to have a discussion with the North Koreans, and it included, obviously, an offer to discuss it in detail. It looked towards a multi-lateral security assurance, and it also looked to a series of phasings that would get into some of the economic issues, and it's been clear, from the statements of South Korea and Japan and China where some of those elements would come in. It included elements in terms of energy support, as one goes through.

So my own sense -- and on top of that, the president made the statement saying we have no -- we're not going to attack or invade North Korea. So I don't know what the North Koreans will do. I think, so far, the response of the other parties has been useful, because it's been emphasizing that the North Korean statement won't be a shakedown or blackmail, as it's been sometimes in the past. But it's my own sense, Senator, that whether they're willing to engage or not engage, you want to keep the structure, because if they are willing to engage, some of these other parties will have points of influence and economic influence and, frankly, you keep some pressure on the North Koreans, and if they don't engage, which is also a possibility, you're going to need that structure to try to deal with the nature of the problem, either in terms of our deterrence with our allies or also, frankly, to stop the North Koreans from doing things that we don't want them to do.

So I think that's how I would approach the structure of the problem.

SEN. OBAMA: Is there anything else you think we need to be doing with our allies in the area at this point, to encourage the kind of constructive moving forward that you'd like to see?

MR. ZOELLICK: I think we need to be in very close contact but, from my understanding, the secretary has been calling her foreign ministry counterparts, the foreign minister of Korea was here. I know we're in close contact with the Japanese, and I think this helped encourage what was already their initial reaction. The Chinese, as I understand it, were supposed to have a mission either this week or next to North Korea, and it will be important to follow up on that process. But, again, I think, particularly with a country like North Korea, which is so closed off from the world, I have found, Senator, that even people that you work with closely it's so easy to have confused messages that, particularly in this situation, it's important to stay straight and simple, and what we've tried to offer is a framework that offers one path in terms of security assurances, opening economics, another that basically says you're going to stay in isolation. I personally think one of the challenges with a country like this is not to let the day-to-day confused the basic course of direction and then work with your coalition partners to reinforce the message.

SEN. OBAMA: Let me shift gears quickly, then. There's been a lot of debate of late with respect to some of our European allies, some of the developing countries, putting development assistance at the top of the agenda. Again, I apologize if this is ground we've already gone over, and the sense that the United States has been dragging its feet a little bit or has not been taking it as seriously. One commentator, I think, characterized it as perhaps the Europeans and the other developing countries aren't taking the war on terrorism as seriously as we are and, conversely, we're not taking the war on poverty globally as seriously as needs to be taken. And so I'm wondering if you care to comment on the perception, at least, that the United States has not been as bold as, let's say, the Blair government in putting this front-and-center? That, despite some of the creative work that's been done in developing the Millennium Challenge approach that it actually has not been funded or, at least, the money has not started getting out the door to places that need it. I'm wondering if you want to just give me your general assessment in terms of where we're falling short there.

MR. ZOELLICK: Well, I would start, Senator, by saying that one of the things I've gotten to see very close up over the past four years is the important connection of trade and aid. And, frankly, I think one of the lessons of the past is aid alone creates a dependency that is often unhealthy. The Senator and I were talking about the African Growth and Opportunity Act, and some of the capacity-building aspects that are critical, related to that. So one of the things I would say to you European colleagues when you see them is I wish they'd be willing to open up their markets a little bit more in agricultural products including from the developing world.

On the aid side, I do feel that what the president wants with the Millennium Challenge Account is very, very important, because what I've seen over the years is you know how hard it is to get support in the Congress and the public for foreign aid, and one of the reasons is people just felt it hasn't been effective, or they've felt it's used for other purposes. So the reason why the Millennium Challenge Account, in my view, is such a revolutionary notion is that it really focuses on objective criteria that go to some of the other things we talked about -- governance, investment in your people, the health conditions -- and in terms of funding the -- I think Congress has appropriated about $2.5 billion over the past two years, the president has another request for $3 billion. I serve on the board of the Millennium Challenge Account, and I just go a note from the director saying that I think the first loan may be going out in the next quarter or so, which I think will be very important to get the money starting to flow, but I understand people had to put together that organization.

But I think that element, for the United States, is something that we can be very proud of, and we've got to make it work. Because if it works, and there's a big component of this for sub-Saharan Africa. There's also some in Central America. We can, I think, build more support for foreign aid and, if I recall, I think the president is actually committed to try to increase our foreign aid by about 50 percent and, at least from my past experience, that's a heavy lift. So I'm very pleased that we're standing for that.

I would also say that one of the things that I think has been brought to people's attention increasingly in recent years is the health dimension, particularly in places like sub-Saharan Africa where you've got HIV AIDS that just wipes out a whole productive class, and I've seen this in a lot of countries that I work with. So I think the U.S. is, by far, the biggest contributor -- $15 billion to HIV AIDS -- and for the international programs. And, at least from what I've seen, Senator, Mr. Tobias, who came in to run this program, has done a superb job in terms of the elements.

I think those will be issues that we'll also have to deal with. People have talked about malaria, tuberculosis, some of the other aspects that can, in effect, weaken the productivity of the population in the developing world. So I think the challenge here will be a combination of the health policies, the aid policies but also the trade policies.

And just to close on the trade, maybe that's the one I'm just most familiar with -- the reason that's so fundamental is, at heart, one needs to move societies to where they get their own sense of self- respect, the ability to participate and compete, and so by closing markets to these countries, whether they're Central American countries or African countries, we're not only, you know, thwarting their economics, but I feel we're thwarting their political development.

SEN. OBAMA: Well, Mr. Chairman, I thank you very much. I would just note that the soon-to-be-deputy secretary, although many people have claimed him, actually went to high school in Illinois. (Laughter.) So aside from the fact that he attended my law school alma mater, I claim him as well. I think he'll do an excellent job, and I look forward to working with him closely.

SEN. LUGAR: Well, this is good to know of, these close ties between the senator from Illinois and the deputy secretary. (Laughter.)

Let me just follow through on the one of the points Senator Obama made on the Millennium Challenge. This is a personal note -- nine days ago I was asked by the president to go to the funeral of Zurab Zhvania, who tragically died -- the prime minister of Georgia. He was 31 years old and one of the founders of the Rose Revolution. But in that delegation, importantly, Paul Applegarth of the Millennium Challenge came along, and we found, on the ground there in Tblisi, Georgia, some very talented people working for the MCC and, likewise, that this is perhaps the major shoring up of economic strength of that country right now -- the promise of how that application will come along, the need that the president of the country, President Saakashvili pointed out, it has to happen in a few weeks of time rather than along down the trail. We are serious, as a country, about democracy, and the president has pointed at Georgia as a cardinal point, and the Rose Revolution, and then the election of the president of the country.

But the country is poor -- $740 per capita. It has great ambitions, rooting out corruption and firing all the police who have harassed the public and other things totally improbable in that neighborhood. I mention all of this because sometimes we think about foreign aid as somehow divorced from democracy, freedom, the great movements against terrorism. But this is part and parcel, and so I congratulate the president on the budget, which goes to $3 billion- plus. Many of us hope that will be expanded to the $5 billion range, which at least has been mentioned in our hearings, appreciating that the 16 applicants have yet to finish their applications, to at least found the initial programs. But I appreciate the senator raising this, because I share his view that this is really a critical element and one, which, probably because of your membership of that board from the very beginning, will be a part of your portfolio and really an important tool as you visit these countries.

Senator Dodd, I think you have another question.

SEN. DODD: Yes, thank you, Mr. Chairman, and I appreciate your spending an extra couple of minutes. Let me underscore the point the chairman just made and my colleague from Illinois has made who, by the way, Tip O'Neill would love the fact that you are here with politics always being local -- making those ties are very important with the high school of the nominee.

But I wanted to -- we take some parochial pride in Connecticut over the fact that when Harry Truman gave his inaugural address in 1949, it was exclusively on foreign policy, and the point in that inaugural address that people remembered more than anything else was Point 4 in that address, and the author of Point 4 was a relatively unknown, relatively low-level bureaucrat of the State Department who came up with the idea and who managed to get through to the White House with this idea where they were looking for something novel and new to suggest. And Point 4 of that speech was foreign aid, and it has been a great success story over the years, and I think the Millennium Challenge Accounts really are creative ideas in extending that and looking for new ways for us to really make these dollars meaningful.

And having just spent a few days in Nicaragua and Peru and Paraguay, you know, these are countries also accounting, to some degree, on Millennium Challenge Account support and assistance. I just wanted to pick up -- and I raised the issue of the foreign trade stuff and the Darfur issue but, obviously, as you know we've worked closely over the years on Latin American issue. The Free Trade Area of the Americas -- I don't know if this was raised with you at all or not -- I know CAFTA was. But I would hope, and you could give me some quick answers here, if you can. I know you've done a good job in negotiating these agreements. We need to get these agreements up here fairly soon. You and I both know what happens when you delay this process. The closer you get to election day, the reality is it gets harder and harder for these agreements to work. And so my hope would be that there'd be a sense of urgency about moving these items up. You wait a long time on this -- you get into this next fall some time, then the possibility of getting these very important agreements to be considered by the Senate are going to be remote, or get more remote.

So I wonder if you might give us some sense at all if you have at this point of when you think these matters may move along.

AMB. ZOELLICK: Well, first, Senator, I want to thank you for your support. I remember as we start the negotiations with Central America I called you, knowing of your strong interest in this, and I think we probably both feel that in addition to the economic opportunity given the suffering in that region and the lack of democracy, to finally have a moment where you have democracies with the Dominican Republic sort of struggling together is a moment you don't want to lose, so we have these cycles sort of we ignore, and then it goes downhill again. And as you and I know, there's difficulties in some of those countries, particularly Nicaragua, at present.

SEN. DODD: You bet.

AMB. ZOELLICK: I met just yesterday with the Guatemalan vice president. There is an issue that we need to remedy with Guatemala relative to the agreement they're trying to remedy I hope this month. I have separately talked to Chairman Grassley and Senator Baucus and Chairman Thomas about willingness to schedule hearings rather quickly. And I think there is a willingness to do that -- maybe next month. The timing of the actual legislation will obviously depend on talking to the leadership in both the House and the Senate and see when they can bring this up because, as you know, under the trade promotion authority it comes up under an automatic timeframe.

But, Senator, I'll give you 100 percent assurance I feel very strongly about trying to get these agreements done. It's very important for the economy of these countries, it's very important for democracy, and it's an important signal to the overall hemisphere, because we're, to follow on, we're negotiating -- we're very close with Panama on a free trade agreement; we're making headway with Colombia, Peru and Ecuador, and I know you visited a number of those countries. So frankly in terms of sending a signal to the region about the United States' commitment -- this is one of the points of Senator Obama -- a lot of what they want is just to be able to trade with us. For goodness' sakes, it helps us to be able to do that. So I'm pushing for quick attention. And I would just say that also in terms of working with my colleagues at the White House, we're now focusing the business, the agricultural communities and others that are supportive of this.

SEN. DODD: And I hope you would as well, in conjunction with this -- and I mentioned earlier the question of these offset agreements and so forth -- there is a significant job loss that's occurring in the manufacturing sector in this country, and our concerns are that we're not being as strong about some of the highly developed countries that take advantage of us and the drain that's occurring in those areas. The message in both areas I think could be tremendously helpful.

Let me mention as well if I can very quickly the -- and, again, I know Senator Nelson raised this with you. But Latin America generally. I know that President Bush has a fairly good relationship with President Lula. I think he has worked to establish a relationship with some of these other presidents. There's trends. Most of these governments in Latin America, with the exception of Uribe in Colombia, are center-left governments. And if we don't work more closely and these governments don't succeed -- politically and economically -- the answer is not to the right, it's further to the left. You're watching that in a number of countries already. And I hope that -- I know the problems obviously we deal with, with Iran and North Korea, and certainly Iraq take a lot of attention -- reduction has been talked about here, China is tremendously important -- I just hope that we will -- you know the area fairly well. You've spent a lot of time working on these trade arrangements. You know the conditions these people are living under, what's going on in Argentina, what's happened in Nicaragua, what's going on in Colombia, Venezuela obviously. There's a tremendous need. You're going to have 660 million people living south of the Rio Grande in a very short order, not including obviously the populations of this country and Canada to the north. And if we don't create more opportunity there, then these democracies who have taken such pride in the emergence of them over the last decade or so are going to collapse. There's no doubt in my mind that will happen. And so it really does require -- we need good people to head up these divisions within the department, and good quality people. And you've got some wonderful people to choose from to serve in these posts to really make a difference.

And on the matter of Chavez in Venezuela, again, I am very worried. The Chinese are all over Latin America. There were there in Argentina, they were there in Paraguay, in Brazil. They have tremendous need for natural resources, for food, and for energy. And they're offering tremendous prices to be able to have tremendous -- much more than we're talking about. And if we're not careful in how we deal with Venezuela, we could find ourselves in a situation where 13 percent of our petroleum reserves are going to be heading elsewhere. And I know there's concerns about President Chavez, but we need to have some sense of apportionality about how we deal with this and put it in context, or we can find ourselves in deep economic trouble ourselves. So I urge you to see if we can't calm things down here and begin to explore some avenues in how we reach some accommodation to work with elected governments here. And whether we like everything they do or not, it's going to be important that we try and establish those relationships. And I -- you have the experience, you have the background, you know these people, you know these players, Bob, so we're looking to you for some leadership in these areas. Thank you, Mr. Chairman.

SEN. LUGAR: Thank you very much, Senator Dodd. Let me just follow through while you're here on the Venezuela point, because mention was made about that earlier. You commented, Ambassador Zoellick, that oil was fungible and in the event that Venezuela does not ship oil to us, it's shipping it somewhere else, and somewhere else in the world oil might be available to us. In the short run this might be true. This is a point to be pursued perhaps in another hearing dealing really with energy and our foreign policy. But my concern at least in initiating some inquiries about this is that the Chinese and India have been very aggressive, and properly so in terms of their own national security, in attempting to pin down the very last reserves any place on earth right now -- in the former Soviet Union, in Latin America, anywhere else. With the thought which perhaps is not shared in our country, but I'm concerned about it, that the amount of oil available on this earth does have its limits, and the price mechanism may in fact ration that supply in due course as it becomes less and less available to us. But that would have very detrimental effects upon the bottom line of most of us in this country, whether we're heating our homes or our businesses or what have you. In essence, the certainty of supply of our friends in Latin America is of the essence, and our assistance to them so that they may be able to supply more, so long as we have this independence upon foreign oil. Now, I'm one, and you have been another I think who have advocated less dependence upon foreign oil, and that is certainly an avenue to be pursued. But the fact is in our country we have not been pursuing this nearly as vigorously as some of us would like to see. And while that is the case, we have some foreign policy problems. And I think Senator Dodd's point is well taken, without getting into a discussion, President Chavez and the relationship during the hearings for Dr. Rice, now Secretary Rice. Venezuela arose, as you perhaps saw in the record, several times, because members of our committee have been visiting that country, as well as others. And as a result, why this is something we'll want to pursue some more, but I just for the record indicate sort of a notion that this is important to many of our members.

AMB. ZOELLICK: Chairman, if you and Senator Dodd have a minute, I'd be pleased to give you a view of how I see the context of this, but it's up to you. I know you're --

SEN. LUGAR: Yes, please do.

AMB. ZOELLICK: Because I think -- and I did read closely the transcript, and I know from some of our conversations, one of the problems I see is there's always the issue du jour. So whether it be the Venezuelan oil or whether their rifles or so on and so forth. And at least in thinking about the region, I think one has to look in a little bit deeper context of what I think is going on, because I think one of the things that's going on is that one of the problems in Latin America is that sort of the upward mobility of many indigenous and poor people have been basically kept out of the system, because it's been corrupt, it's been oligarchic. It's basically rigged against the poor. And what I think we're seeing now is that the people who are on the margin of the traditional society -- the indigenous people, the poor -- are using some of the democratic openings, and they're saying, Look, I want my share. I want my piece of this. And I think it is critically important -- and I hope to work with you to do this -- the U.S. should be identifying with those people. We are a society that challenges the status quo, we favor openness, we favor the types of change.

Now, we can't do it for them, okay? And so part of this will be what combinations of trade agreements, what combinations of our democratic support, microlending -- a lot of it is creating the legal infrastructure, if people don't have basic property rights. I mean, De Soto thesis and other aspects of this. And so I think there's ways we can help.

Now, bringing this to Chavez, I think what you're seeing happening throughout the region is there's a new Pied Piper of populism that's going on, so I would -- whether -- I don't look at it, Senator, as left to right, because the first person to do this was Fujimori. Okay? So I don't know, is he right or left Peru? And the same with, you know I think, with Chavez. And I think it's a very dangerous course for these countries. You saw what eventually it did to Peru. And I think, coming back to where we need to go with this, is that -- and I know Senator Dodd and Senator Lugar both were key parts of this -- you know the history in this region of resisting foreign intrusion and the Calvo doctrine. So what we did in 1991 with the Santiago Declaration in 2001 about protecting democracy in the region is a huge step. The problem is it's basically oriented towards the old threat of coups. It's not oriented towards what we're now seeing, which is a creeping authoritarianism. Sure, you win the election, but you do away with your opponents, you do away with the press, you do away with the rule of law, you pack the courts.

I think one of the challenges -- and I'd be pleased to talk with you further about your thoughts of this is that we need to work with the OAS and some of these other parties to try to say, Look, if we mean what we say about democracy and we want to try to help some of these people, we have to try to set some standards on this. Now, the reason I partly make this point is that I personally believe that Chavez sort of feeds off confrontation, and you know he wants to set this up as David and Goliath. And my own view is that what we can do effectively with him -- is we shouldn't be afraid to say when he's taking away liberties -- not at all -- and we should stand for that. But at the same time, we also need to stand for some of the people that created the resentments that he has been tapping, because frankly the Venezuelan governments of the past, whatever their party, they didn't serve the people. So part of what we need to do with the assistance that we have, with trade, with other programs, with exchanges -- I talked to Senator Alexander about maybe creating something new in this -- is that we need to be able to get ourselves associated with what we truly believe, which is helping those poor people have a chance. And so that's at least -- I, you know, wanted to give you some preliminary thinking about how I would approach the problem, but I think in the meantime we also shouldn't fool ourselves. You know, Chavez has done some terrible things, and we should say that. And, in the meantime, we should try to help those, frankly -- I'm sure you visited Colombia -- I've been there three times recently -- is that, who are frankly doing a very impressive job. And I'll say, chairman, there were some questions about Uribe did, that I went in the hearing with Secretary Rice, I went back and checked -- they haven't occurred in terms of blocking his opposition and things like that. So make some of those areas work -- Central America, Colombia, Chile -- and then expand it, and then frankly try to get some others to work with us to say if we believe in democracy we've got to stop creeping authoritarianism too.

So I apologize for going on, but I know the senator has -- both of you have the strong interest in this. And I just want to give you the context at least in which I would be approaching these issues.

SEN. LUGAR: I think we appreciate very much your taking this time. That was a very important statement, I believe, and one which we have a lot of common feeling and ability to work together. But I appreciate especially the thought we need to identify with the poor who are outside the spectrum, because whether it is the countries you mention, or even Bolivia comes to mind as a dramatic case in which a good number of people who are outside the pale of government could create extraordinary dilemmas for governments at all, and even if this is not at the forefront of the interests of the press or some in even this committee, why it's important to those who are following Latin America, and the senator from Connecticut has been the foremost among the members of this committee for a long time in doing that.

SEN. DODD: Mr. Chairman, I thank you. Well, I can't thank you enough for that statement. That's the most encouraging statement I've heard about Latin America in a long, long time, and I'm really heartened to hear you say what you did, and I look forward to working with you on this as well, and I certainly don't disagree that where people do things we disagree with we ought not be shy. We get the legitimacy of saying that if we're doing both. That's all you're doing. Then it becomes -- it doesn't work, you know? And Chavez shows up in Brazil, and a hundred thousand people turn out to see him. And he gets a stronger welcome than the president of the country does -- a nation he's visiting. You get some idea of what's occurring in the region, and so it's an important signal.

Can I just mention briefly too -- and I meant to mention this -- and, again, we thank the efforts being made on AIDS, and obviously -- and Africa is such a critical area. Can I ask you as well though to take a look at this, aside from Haiti and Guyana, we're not doing much at all on AIDS in these small Caribbean islands. They're small places, but they have almost as high a degree a problem with AIDS as the sub-Saharan regions do in Africa. And we have 10 million Americans that travel to these islands every year as tourists. Some 600,000 people from these islands travel to the United States to visit family members and the like, and they're pretty much excluded from the AIDS packages. Basically other than Haiti and Guyana it's -- they're not part of the deal. And I wonder if you might look and see how we can make them part of the effort. I think it's a very important message, picking up on your last comment to these small independent island nations here that we understand the problems there are serious. There are literally thousands of these orphan children living down there that don't get quite the attention given the scale. Obviously the numbers are much smaller overall what we're talking about in Africa, but still as a proportion of their population they're huge, and really deserve more attention.

AMB. ZOELLICK: I'd be pleased to, Senator. I had a similar experience in that I know that the new Global Fund focused on I think 15 countries, and Lesotho wasn't part of it, and Lesotho has actually been a great performer in lots of things. I talked with Mr. Tobias, and we actually got some support. So I'll be happy to try to do this, sir.

SEN. DODD: Terrific. Great. Thanks very much. Thanks, Mr. Chairman.

SEN. LUGAR: Thank you, Senator Dodd. Let me just mention also the mention of Hernando de Soto. I would add Vargas Llosa, people that are meaningful to you, meaningful to all of us, having addressed some of these issues. And it is good that their thinking permeates the atmosphere and comes back.

Let me just follow on the AIDS question, because I have two or three more things that I wanted to ask. But one of them was simply to follow through on what might be called the second-wave countries. After the 15 that have been designated now, essentially in addition to the Latin American countries are the Caribbean islands that Senator Dodd mentioned, very large countries such as Russia and China and India, apparently have substantial problems -- at least there are indigenous reports of that. What do you envision, granted the administration has a compelling interest, and that's been manifested in the budget request, for the follow through not only with the 15 countries over the five-year period of time that we're dealing with them, but also what might be called the second wave, including some very large entities?

AMB. ZOELLICK: Well, my understanding, Senator, is that of the president's five-year, $15 (sic) plan, $10 billion is devoted to the 15 countries.

SEN. LUGAR: I see.

AMB. ZOELLICK: Four billion is devoted to an additional 85 countries, including international research. And then of course we contribute another billion to the Global Fund to fight AIDS, tuberculosis and malaria, which other countries also contribute to as well. So there are other -- there are funds as part of the president's program to go to these other items. I think the logic of this was to try to focus on some of the poorest countries, particularly sub-Saharan Africa, try to make a difference. In a way it goes back to the point I made with Mr. Obama. We both know how hard it is to get aid funds. We need to start to show we're making a difference in some of these places, whether it be sort of with the Millennium Challenge Account or these sets of issues. And indeed -- I know you probably saw that Mr. Tobias's first report in terms of the numbers of people that they had -- they had, let's see, they so far within the first full year they've treated at least 200,00 HIV- infected people, prevented 1.3 million new infections, care for 1.1 million people, including over 500,000 orphans. This is the sort of results we have to get if we're going to build ongoing support. So I think that was the concept of the focus. But there is -- there are funds for these other countries.

SEN. LUGAR: Well, I thought the Tobias report was extremely significant. Frequently we talk about what kind of metrics there are, what kind of measurements we can use as either benchmarks or reports to the people of this country, as well as the rest of the world. And I'm hopeful there will be greater publicity of the Tobias report. I think it's known to a few people here in the Congress who are deeply interested, but not to many. And so I ask if this is not your responsibility at the State Department necessarily, but it is -- it serves a diplomatic message in terms of our public diplomacy, to ourselves as well as to others, to understand that something is happening, that country by country a certain number of people had been treated, and we estimate that a number of tragic cases have been prevented but what has occurred.

Now, let me ask about Pakistan. We frequently in our committee noted the work of the Pakistani military attempting to arrest al Qaeda leaders in operating in Pakistan, and certainly President Musharraf has affirmed that he sees as his responsibility and that of the military of that country. And, as a matter of fact, recently Pakistan has arrested several Afghan Taliban leaders. But at the same time it always appears that for some reason this is not going as satisfactorily as we would like. The Pakistanis indicate that this is, after all, a sovereignty question. Our military ought not to be in hot pursuit across the Afghanistan border, and even if we are looking for Osama bin Laden or for other functionaries that might be important to us.

What is your own view of how that is proceeding, both the relationship as well as the efficacy of the Pakistani forces?

AMB. ZOELLICK: Well, I know that Secretary Rice made a core point, and I think it's worth emphasizing, which is it's important to look from whence we've come and where we are. But, of course, there's much more to do. You know, in 2001, before September 11th, you had a Pakistan that was on the verge of slipping to extremism, was supporting the Taliban, was fueling additional problems with Kashmir. And frankly, we didn't have any relationship with it of any type.

And I think now we've got a partner that, from what I've been able to see, Senator, is a strong partner in the war on terror, working with the Afghans on the trade and economic issues. When I saw the Afghanis, it was quite clear, as an inland country, they need to have relations with their neighbors, and so we had to work out some issues related to some border topics with Pakistan. India-Pakistan relations have improved. There's a process going forward, still some very difficult issues, but at least it's headed in the right direction.

And now, at least what I've seen, Chairman, is that they are sending military forces into some of these border issues which were semi-autonomous and probably have been wild for centuries. So I don't mean to underestimate the scope of the difficulty. And in our focus on democracy, we're looking towards elections in 2007 in Pakistan.

But I think there's been a lot of progress, and I think one of our challenges for this term will be to try to build on that progress.

SEN. LUGAR: Let me mention that even as we attempt to build on the military progress, we've had testimony before our committee about the madrasa schools or, worse, schools that don't really have much organization, and a public education system in Pakistan that appears to be foundering, or perhaps really never got off the ground in a large movement.

And many have commented, if we are very serious about the root causes of terrorism, or even the production of persons who, as Jessica Stern has pointed out in her book, after she visited with young men who were suicidal in their intent coming out of this situation, as to why -- what brings people at a young age to have those views? And it's derivative from an educational system, or lack of it, in a very large country involving a lot of people and a lot of money.

I know that you've thought about this situation, and our committee has tried to explore with administration witnesses and those who had something to do with it. I've had a personal experience with a classmate from Denison University, where I attended, Dr. Peter Armacost, who was a university president in our country but now has committed his life to Forman (sp) University in Pakistan, a university that President Musharraf attended and therefore has an interest.

And I mention that because here essentially Presbyterian Church of the United States has come together with people of other faiths, and students, 6,000 at least, as I understand, are receiving college education with a good bit of American participation, along with Pakistanis and even church people of the Muslim faith.

I mention all of this because these are isolated instances, but they offer opportunities for some insight in which Americans, as educators, and in a humanitarian way, have taken an interest in this problem, as opposed to somebody saying it's very big and the numbers are awesome.

Do you have any views, really, in terms of what we might do with the Pakistan education system and our overall public diplomacy? What important aspects are there to this issue?

AMB. ZOELLICK: Well, the point that just jumps out at me, Chairman, is one where we've seen a huge change in Afghanistan, which is the education of women. And, you know, if I would put an emphasis on anything in Pakistan, it would be trying to make sure that young girls have the same opportunity that young boys do.

I once asked a very well-known scholar that studied the Islamic world what did he think was the major reason for this sort of clash with modernity and sort of the Muslim world falling behind. And I was very much struck by his answer, which he said if you take 50 percent of your population and don't allow them to contribute to your society, you're not going to keep up.

And so I certainly know much less about the Pakistani education system. But perhaps some of the progress that has been made in Afghanistan, educating girls as well as boys, is something that can be extended, if it's not at present, in the Pakistani area.

And I think the second point that your comment evoked from me is that, you know, you gave good examples of where the private sector and private individuals are playing very, very important roles in this. I think part of the challenges of a transformational diplomacy is how we create the structures for that to work effectively.

It's what we do in economics. You know, I don't do the trade myself. I try to create an enabling environment. Well, similarly we need to try to create an enabling environment, whether it be the Peace Corps or whether it be church groups or others, that sort of continue America's message.

And the third point that your comment suggested to me is one that I felt about public diplomacy, and that is, you know, the traditional press diplomacy business is more of a reactive business. You're dealing with today's story. It's sort of the Washington-centered sort of press briefing.

We have to be out telling America's story, just as when you go back to Indiana, there may be some news that isn't news in Washington. But by working in a local media context and pushing the story about something, what it's doing, you are kind of conveying the message.

Your comments about HIV/AIDS -- you know, we're helping people all around the world every day, whether it's HIV/AIDS grants, whether it be some trade arrangement, whether it be a microlending grant. As an individual, I tried to draw attention to this on my trips, so I would always try to work in an aspect of public diplomacy-related so that you have the policy related to action related to message.

And so I think, more broadly, that is something that at least your comments evoked, that I hope we can use to try to address this larger question of America's public image in the world.

SEN. LUGAR: Well, I like that comment a lot, and I mention it because you will be traveling a lot. You have opportunities just personally in your role to talk about these ties, often with personalities or organizations or what have you, at the grassroots of our country, or of the country which you're visiting, which can be very, very important as these stories are replicated elsewhere.

Now, let me just say, with regard to their neighbor, India, that certainly our country has been hopeful that the negotiation between India and Pakistan will be fruitful. What more do you envision we might be able to do to keep those talks on track? They have been dealing with a number of issues.

Obviously the overall problems in Kashmir are enormous. They cannot be dealt with just as an agenda item in a particular hearing. But still, the need for peace, for some degree of tranquillity for the benefit of the people involved, as well as for the rest of the world, given the size and the scope of those countries, is tremendously important. And I just ask you during this hearing for your views on what we can do constructively there.

AMB. ZOELLICK: Well, I think the first good news, Chairman, is that both President Musharraf and Prime Minister Singh seem to have expressed a strong commitment to this overall peace process. And I think this is where we have to walk a very fine line. I think we need to look for ways to encourage that process but keep the parties at the heart of it. This is not something we can fix for them.

I think one area that I know there have been some track-two discussions -- I don't know what's happened at the governmental level -- is nuclear confidence-building as a very important element, an area you would know well from your other work. And then I think we need to make clear that we stand ready with the parties to try to help as they proceed, whether it be in confidence-building or other aspects.

And then, finally, Chairman, I think, in general -- you've seen this with some of my answers -- when you get a diplomatic problem, it's also how you kind of work the context of it. And in this case, we have far better relationships with Pakistan as I described than we did three or four years ago. And I'm absolutely delighted we have a far better relationship with India. And I think both Ambassadors Blackwell and Mulford deserve a lot of credit for this.

One of the things that I would like to do is to try to see what we can do in sort of a second stage in terms of developments of relationships with India. We talked a little bit, Senator Hagel, about the high-tech trade, and there's been an expansion. But there's some other things that we've looked at trying to explore with the Indians in terms of some of the civil nuclear area, civil space, high- technology exports; on the security side, missile defense as well.

So, going back to the president's core principle about supporting freedom and democracy in the world, I think one of the challenges of the next four years is, in addition to working with the established democracies of Western Europe and Japan, the type of relationships that we can create with the Indias, the Brazils, the South Africas, the developing-country democracies.

Now, I've had a fair amount of experience with this over the past four years, because those are the countries I deal with regularly in the WTO. And sometimes it's very frustrating to try to open up markets. But I think, to go with the question that you posed in the relationship, I think we also need to see part of the challenge is strengthening the relationship with the two individual countries.

SEN. LUGAR: Let me ask about your neighbor and Afghanistan -- the re-submitted congressional notification on a new Afghanistan counter-narcotics strategy arrived this month and proposed $776.5 million for 2005. It still leans heavily, in our analysis, toward eradication. Other potential pillars, such as the justice sector, alternative livelihoods, the interdiction of traffickers, have received far less assistance despite the significant role they play, unfortunately, in this very fragile state. What is the future of our role with those in Afghanistan led by the president of the country, President Karzai, who has identified this issue. In our hearings, we have learned, on occasion, maybe as much as half of the entire GNP of the country is involved in poppies and production, then, of the substances that come from those farmers. So it's a serious issue, and we've grasped that. Others, maybe perhaps are disappointing in terms of their response, but can you give some oversight as to how this is likely to progress?

AMB. ZOELLICK: Well, as Secretary Rice mentioned, we believe we need to stress five components, and they have to be interconnected. One is the eradication you mentioned, but a second is interdiction. A third is alternative livelihoods, and we've seen this actually work in the Colombian context, where it's one thing to stop people from growing something, but you've got to give them a chance to grow something else or have an alternative livelihood. And then, fourth, is basically the public de-legitimization and here, at least from what I've seen, Karzai has started to play a very important role in making this a moral issue in terms of Afghanistan and, at least, I saw one early news account that suggested that plantings were way down this year. Now, whether that can be sustained, I think depends on whether some of these other people's -- or other fall in place. And then the fifth element, as you said, is it has to be connected to an effective law enforcement system and even integrating what I was saying with Senator Dodd about the Western Hemisphere. I think one of our challenges is going to be trying to work with countries at what I'll call the "second stage of democracy development" -- building the civil institutions, the law enforcement system, the courts, the prisons -- this is clearly one of the big challenges in Iraq today as well. And the State Department has a function in that, and I've appreciated, from what I've seen, the support that you offered in terms of trying to help us add and build some of those capabilities.

SEN. LUGAR: Well, that will continue, and I appreciate these responses in areas where you have been traveling and will be traveling. Let me finally conclude with a question back home about the management of the department itself. It's been the observation of senators and our staffs that we believe there is a certain amount of duplication of administration and overhead costs undertaken by various bureaus at the State Department; that many of the contracting and program management costs are being taken on by each bureau running programs independently, duplicating the capabilities that have been authorized by agencies, such as USAID, to take an example.

I just simply ask that, in your new responsibilities, you study this problem. You have a good background in terms of financial management, organizational structure in addition to this comprehensive view, country-by-country, that we have taken you through today. Do you have any initial reflections as you have taken a look at the department prior to undertaking this responsibility? Do you see possibilities for management changes that are not dramatic and discomforting to the members of the department but still would make sense?

AMB. ZOELLICK: Well, I need to look a lot more, and I will, Senator, and if you or your staff have some ideas of where you think there can be some -- or there is duplication or overlap, I'd certainly be delighted to see them. I'll make a general point, which is the State Department's organization chart is kind of a multiple matrix and creates the executive secretary with the most challenging job in the world -- how to get all these pieces fitting together.

But as some of the question here revealed, there's reasons for that -- somebody wants a special envoy for this; you want a special office for that. So, to be honest, Senator, if we're going to get at some of this, we're actually going to need to work with some of the members of the committee, who also want to create an office every time there is a new issue.

Now, maybe, as your question suggested, there are some functions that cut across offices and ones that create some additional efficiencies, but I think that, in general, part of the challenge is that -- I think the secretary has mentioned that she wants to look at, is as we consider some of the new functional demands of our diplomacy -- some of the ideas that you've developed, for example, with the reconstruction and stabilization. How do the pieces fit more effectively with that? So I think we need to do some more homework and thinking, but then I will seek your indulgence to also help us with colleagues who each have a favorite office and piece and never want to see it changed.

SEN. LUGAR: Well, that's a very important point to make and a challenge to the members of this committee in terms of individual enthusiasms. Let me just say, for my part, I strongly support the secretary and your efforts in trying to rationalize how all this came about. We have been frustrated in terms of our authorization legislation, which might have helped to change at least the basic legislation. On some occasion, we may be able to finally pass that, and that would be helpful to the department as well as our own views. But, absent that, much of this will have to occur administratively as you wrestle with this and with our support, and you'll have to point out, as you just have, some of this comes about because of congressional enthusiasm.

I think, at the same time, there is equal congressional enthusiasm, perhaps more so, for a cleaner chart, as you've described these lines today, and perhaps for some examination, too, in such areas as the roles of our ambassadors abroad. What should they be responsible for in the year 2005 as comparative to 10 or 20 years ago, given modern communications, given the travels of you and the secretary? Who ought to do what and how are these people interrelated to all the functions we've talked about as well as to our overall foreign policy. And that, I suppose, could be replicated in any number of ways less dramatic than our embassies themselves, other offices that we have abroad as they interrelate.

But we very much appreciate this opportunity for this hearing, because it has been, as you've noticed, well attended by a large majority of our members, most of whom had an opportunity to ask questions that illuminated their interest but offered you an opportunity, I think, for some very important answers. I think the record of the hearing will be constructive all by itself and largely because of the quality of your answers.

So we thank you for this appearance. We look forward to taking action on the nomination as rapidly as possible. We understand the urgency of confirmation, if that is the will of the Senate, and I hope that it will be.

AMB. ZOELLICK: Thank you very much, Mr. Chairman. I look forward to working with you, if the Senate exercises its will.

SEN. LUGAR: Thank you very much, sir, and the hearing is adjourned.

END.