```

[Senate Hearing 109-442]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 109-442

 
        CHALLENGE OR OPPORTUNITY? CHINA'S ROLE IN LATIN AMERICA

=======================================================================

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON WESTERN HEMISPHERE,
                   PEACE CORPS AND NARCOTICS AFFAIRS

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 20, 2005

                               __________

       Printed for the use of the Committee on Foreign Relations

  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html

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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                 ------                                

               SUBCOMMITTEE ON WESTERN HEMISPHERE, PEACE
                      CORPS AND NARCOTICS AFFAIRS

                   NORM COLEMAN, Minnesota, Chairman

LINCOLN CHAFEE, Rhode Island         CHRISTOPHER J. DODD, Connecticut
GEORGE ALLEN, Virginia               JOHN F. KERRY, Massachusetts
MEL MARTINEZ, Florida                BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida

                                  (ii)

  

                            C O N T E N T S

                              ----------                              
                                                                   Page

Coleman, Hon. Norm, U.S. Senator from Minnesota..................     1
    Prepared statement...........................................     3
Johnson, Stephen, Ph.D., Senior Policy Analyst for Latin America, 
  The Heritage Foundation, Washington, DC........................    27
    Prepared statement...........................................    30
Lampton, Dr. David M., Ph.D., Director, China Study Program, Paul 
  H. Nitze School of Advanced International Studies, Johns 
  Hopkins University, Washington, DC.............................    35
    Prepared statement...........................................    37
Luft, Dr. Gal, Ph.D., codirector, Institute for the Analysis of 
  Global Security, Washington, DC................................    41
    Prepared statement...........................................    43
Nelson, Hon. Bill, U.S. Senator from Florida.....................     5
Pardo-Maurer, Rogelio, Deputy Assistant Secretary, Western 
  Hemisphere Affairs, Department of Defense, Washington, DC......    12
    Prepared statement...........................................    15
Shapiro, Hon. Charles S., Principal Deputy Assistant Secretary, 
  Bureau of Western Hemisphere Affairs, Department of State, 
  accompanied by Robert Forden, Deputy Director for China and 
  Mongolian Affairs, Bureau of East Asian and Pacific Affairs, 
  Department of State, Washington, DC............................     4
    Prepared statement...........................................     8

             Additional Statement Submitted for the Record

Hale, David, Hale Advisers, LLC, Chicago, IL, prepared statement.    55

                                 (iii)

  

        CHALLENGE OR OPPORTUNITY? CHINA'S ROLE IN LATIN AMERICA

                              ----------                              

                      TUESDAY, SEPTEMBER 20, 2005

                           U.S. Senate,    
        Subcommittee on Western Hemisphere,
                Peace Corps, and Narcotics Affairs,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:32 p.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Norm Coleman 
presiding.
    Present: Senators Coleman and Nelson.

   OPENING STATEMENT OF HON. NORM COLEMAN, U.S. SENATOR FROM 
                           MINNESOTA

    Senator Coleman. This hearing of the Senate Foreign 
Relations Subcommittee on Western Hemisphere, Peace Corps, and 
Narcotics Affairs will come to order.
    These are very busy times, I will note to the panelists. 
First I want to thank them for their attendance and 
participation today. This is a very important discussion. When 
I left, our conference was having an all-conference briefing 
from FEMA and the Coast Guard on Hurricane Katrina, so that 
will, I think, account for some of my colleagues not being 
here. But I did want to go forward with the hearing as 
scheduled. This is part of what will be an ongoing conversation 
and, I think, a very, very important conversation.
    Minnesota native and Pulitzer Prize winning journalist, Tom 
Friedman, has recently published a new book called ``The World 
is Flat.'' The book is a major data dump of facts about how the 
world has changed, particularly with the rise of China and 
India. On some editions the cover depicts a boat sailing over 
the edge of the Earth and the jacket cover says that the 
painting is called ``I Told You So.''
    That is kind of a grim joke, but it is a serious warning. 
We have to understand the new dynamics at play in this 
interconnected world. In the end, we will either ride the waves 
of opportunity or we will be swept out to sea.
    There can be no question that China is playing an 
increasing role in Latin America, as it is elsewhere around the 
world. Between 1999 and 2004 China's imports from Latin America 
increased sixfold and its exports more than tripled. In 2003 
Latin America was the destination of fully one-third of Chinese 
foreign direct investment.
    A number of high profile visits further illustrates China's 
growing interest in Latin America. Since President Jiang 
Zemin's 13-day tour of Latin America in April 2001, President 
Hu Jintao has visited Latin America twice, including Mexico 
earlier this month, and China's Vice President visited the 
region in March of this year.
    The overall pattern seems to be the following: A Chinese 
official visits a Latin American country, China makes an 
attractive offer to that country: Market access for 
agricultural and other goods; a substantial commitment of 
investment; and/or the country's designation as an official 
tourist designation for Chinese visitors. In exchange, China 
gets certain benefits: The country's designation of China as a, 
``market economy,'' which decreases the country's ability to 
apply antidumping measures against Chinese imports and/or the 
country's switching its diplomatic recognition from Taiwan to 
China.
    China's outreach in Latin America includes military 
cooperation. China is establishing and strengthening military 
exchange programs in the hemisphere even as the United States 
is restricting our military-to-military relations because of 
differences over the International Criminal Court. In 2004, 20 
senior Chinese defense officials visited Latin America. In 
addition, China sent 125 peacekeepers to Haiti, the first 
military operation in the Western Hemisphere with Chinese 
troops.
    China is also becoming increasingly active in hemispheric 
multilateral institutions. China gained observer status at the 
Organization of American States last year and would like to 
join the Inter-American Development Bank.
    Chinese criminal elements are having an impact on the 
Western Hemisphere as well. It is estimated that two-thirds of 
Brazil's pirated goods originate in China, and a considerable 
amount is trafficked through the triborder region. China is a 
major source country for ephedra, a principal component for the 
manufacture of methamphetamine, which is a plague that is 
growing larger and larger in the United States.
    China's influence is not the same throughout the region, 
however. Countries like Brazil, Chile, Argentina, and Venezuela 
view China positively as an important and growing market for 
their oil, copper, and soybeans. Places like Mexico, the 
Dominican Republic, and Central America, on the other hand, may 
be more concerned about the fact that many of their low-wage 
jobs have been displaced to China.
    Overall, China's influence in the region appears unlikely 
to supersede the United States' any time soon. United States-
Latin America trade is 10 times greater than China-Latin 
America trade and American investment in Latin America dwarfs 
China's by even greater margins. Our history, values, and 
geography also bind the United States to Latin America in a way 
that China cannot match.
    However, China's staggering economic growth and its 
insatiable need for natural resources, particularly energy, is 
a global phenomenon that will have an effect in the United 
States and one that certainly merits our attention. At minimum, 
we must find ways to ensure that American influence in the 
Western Hemisphere is not diminished by an increasingly active 
China. Economically, we should be looking for ways to work 
cooperatively as a region to increase our global 
competitiveness in the face of a growing China, a rapidly 
developing India, and a united Europe. The United States must 
also be aggressive in our diplomacy so as to dissuade any 
notion of a vacuum that China is filling in the hemisphere.
    I would also challenge our witnesses to look for the 
opportunities presented by a major world power showing interest 
in this hemisphere. Are there ways to engage China in Latin 
America? Where there is instability in this hemisphere, can 
China play a constructive role? Are there opportunities for the 
United States, China, and Latin America to work together in 
ways that benefit all?
    [The prepared statement of Senator Coleman follows:]

  Prepared Statement of Hon. Norm Coleman, U.S. Senator From Minnesota

    Minnesota native and Pulitzer Prize winning journalist, Tom 
Friedman, has recently published a new book, ``The World is Flat.'' The 
book is a major data dump of facts about how the world has changed, 
particularly with the rise of China and India. On some editions, the 
cover depicts a boat sailing over the edge of the earth. The jacket 
cover says the painting is called ``I Told You So!'' That's kind of a 
grim joke, but it is a serious warning. We have to understand the new 
dynamics at play in this interconnected world. In the end we will 
either ride the waves of opportunity or be swept out to sea.
    There can be no question that China is playing an increasing role 
in Latin America, as it is elsewhere around the world. Between 1999 and 
2004, China's imports from Latin America increased sixfold, and its 
exports more than tripled. In 2003, Latin America was the destination 
of fully one-third of Chinese foreign direct investment.
    A number of high-profile visits further illustrate China's growing 
interest in Latin America. Since President Jiang Zemin's 31-day tour of 
Latin America in April 2001, President Hu Jintao has visited Latin 
America twice, including Mexico earlier this month, and China's Vice 
President visited the region in March of this year.
    The overall pattern seems to be the following: A Chinese official 
visits a Latin American country. China makes an attractive offer to 
that country: Market access for agricultural and other goods, a 
substantial commitment of investment, and/or the country's designation 
as an official tourist destination for Chinese visitors. In exchange, 
China gets certain benefits: The country's designation of China as a 
``market economy'' which decreases the country's ability to apply 
antidumping measures against Chinese imports, and/or the country's 
switching its diplomatic recognition from Taiwan to China.
    China's outreach in Latin America includes military cooperation. 
China is establishing and strengthening military exchange programs in 
the hemisphere, even as the United States is restricting our military-
to-military relations because of differences over the International 
Criminal Court. In 2004, 20 senior Chinese defense officials visited 
Latin America. In addition, China sent 125 peacekeepers to Haiti, the 
first military operation in the Western Hemisphere with Chinese troops.
    China is also becoming increasingly active in the hemisphere's 
multilateral institutions. China gained observer status at the 
Organization of American States last year, and would like to join the 
Inter-American Development Bank.
    Chinese criminal elements are having an impact in the Western 
Hemisphere as well. It is estimated that two-thirds of Brazil's pirated 
goods originate in China, and a considerable amount is trafficked 
through the triborder region. China is a major source country for 
ephedra, a principal component in the manufacture of methamphetamine.
    China's influence is not the same throughout the region, however. 
Countries like Brazil, Chile, Argentina, and Venezuela view China 
positively as an important and growing market for their oil, copper, 
and soy. Places like Mexico, the Dominican Republic, and Central 
America, on the other hand, may be more concerned about the fact that 
many of their low-wage jobs have been displaced to China.
    Overall, China's influence in the region appears unlikely to 
supersede the United States' anytime soon. United States-Latin America 
trade is 10 times greater than China-Latin America trade, and American 
investment in Latin America dwarfs China's by even greater margins. Our 
history, values, and geography also bind the United States to Latin 
America in a way that China cannot match.
    However, China's staggering economic growth and its insatiable need 
for natural resources, particularly energy, is a global phenomenon that 
will have an effect in the United States, and one that certainly merits 
our attention.
    At a minimum, we must find ways to ensure that American influence 
in the Western Hemisphere is not diminished by an increasingly active 
China. Economically, we should be looking for ways to work 
cooperatively, as a region, to increase our global competitiveness in 
the face of a growing China, a rapidly developing India, and a united 
Europe. The United States must also be aggressive in our diplomacy so 
as to dissuade any notion of a ``vacuum'' that China is filling in the 
hemisphere.
    I would also challenge our witnesses to look for the opportunities 
presented by a major world power showing interest in this hemisphere. 
Are there ways to engage with China in Latin America? Where there is 
instability in this hemisphere, can China play a constructive role? Are 
there opportunities for the United States, China, and Latin America to 
work together in ways that benefit all?

    Senator Coleman. We will begin today's hearing with the 
view from the Departments of State and Defense about how United 
States policy in Latin America takes into account China's 
growing presence. Ambassador Charles Shapiro is Principal 
Deputy Assistant Secretary of State for Western Hemisphere 
Affairs. A career member of the foreign service, Ambassador 
Shapiro was most recently posted as Ambassador to Venezuela. He 
has previously served as Director of the Office of Cuban 
Affairs, as Deputy Chief of Mission in Santiago, Chile, as 
Deputy Chief of Mission in Trinidad, and as a political officer 
in San Salvador.
    He has held numerous posts in Washington, DC, including 
Executive Assistant in the Bureau of Western Hemisphere 
Affairs, International Relations Officer in the Office of Latin 
American Programs at the Bureau of International Narcotics and 
Law Enforcement Affairs, and Deputy Director of the Office of 
Andean Affairs.
    Ambassador Shapiro will be supported by Mr. Robert Forden, 
Deputy Director for China and Mongolian Affairs at the 
Department of State. Mr. Forden is a career foreign supervisor 
officer with experience in Beijing, Taiwan, and Hanoi.
    Mr. Roger Pardo-Maurer is Deputy Assistant Secretary of 
Defense for Western Hemisphere Affairs. Before joining the 
Department of Defense, Mr. Pardo-Maurer was president of 
Emerging Market Access, a Washington, DC, consulting firm. He 
was also managing partner of Access NAFTA Project Management, a 
trade investment advisory firm, and president of Chartwell 
Information Group.
    Mr. Pardo-Maurer has worked as a Latin American specialist 
at the American Enterprise Institute and at the Center for 
Strategic and International Studies. He has also served as 
chief of staff of the representative of the Nicaraguan 
resistance. Mr. Pardo-Maurer is an enlisted reservist in the 
U.S. Army's 20th Special Forces Group.
    We will begin with Ambassador Shapiro.
    Ambassador Shapiro. Thank you very much, Mr. Chairman. I am 
pleased to appear before you this afternoon to discuss the 
diplomatic, political, and economic implications of----
    Senator Coleman. Mr. Ambassador, if I can, since you just 
started, I would love to give my colleague from Florida, 
Senator Nelson, an opportunity to make a statement before you 
begin your testimony.
    Senator Nelson, when you catch your breath and gather your 
thoughts.

    STATEMENT OF HON. BILL NELSON, U.S. SENATOR FROM FLORIDA

    Senator Bill Nelson. You are very kind, Mr. Chairman. This, 
of course, is an enormously important subject to us, not only 
for the Western Hemisphere but for the entire world. The 
relationship that we have had with Venezuela, for example, is 
now being strained, and one question is whether or not it would 
be further strained by a growing oil relationship between 
Venezuela and China..
    Another issue of enormous importance to us is the extension 
of terrorism out of the Middle East into Africa and Latin 
America, and how the Chinese can be our partners in fighting 
terrorism, because they have as much a stake in that as we do.
    We are discussing Latin America today, but the United 
States and China are increasingly coming together, for example, 
in dealing with North Korea, and realizing it is not in China's 
interests and certainly not in America's or the rest of the 
world's interest that North Korea have a nuclear bomb.
    So I am really looking forward to the discussion of this 
panel here.
    Senator Coleman. Thank you, Senator Nelson.
    With that, Ambassador Shapiro.

    STATEMENT OF HON. CHARLES S. SHAPIRO, PRINCIPAL DEPUTY 
  ASSISTANT SECRETARY, BUREAU OF WESTERN HEMISPHERE AFFAIRS, 
   DEPARTMENT OF STATE, ACCOMPANIED BY ROBERT FORDEN, DEPUTY 
DIRECTOR FOR CHINA AND MONGOLIAN AFFAIRS, BUREAU OF EAST ASIAN 
    AND PACIFIC AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, DC

    Ambassador Shapiro. Thank you very much, Mr. Chairman, 
Senator Nelson. It is with great pleasure that I appear before 
you this afternoon to discuss the diplomatic, political, and 
economic implications of China's engagement in Latin America 
and the Caribbean and the challenge and opportunity that this 
presents the United States and our allies and friends during 
the next quarter of a century.
    I have provided the subcommittee with written testimony, 
but there are several key areas that I would like to highlight 
now with your permission. China's growth and development have 
naturally brought growing relationships with traditional United 
States allies in the region. This does not diminish U.S. 
influence or capabilities. U.S. policy toward Latin America is 
anchored in our strong and enduring alliances, which continue 
to provide unprecedented stability and prosperity in the 
region.
    Our allies throughout Latin America believe good United 
States-China relations are important to global peace, 
prosperity, and stability. Our efforts to work with China 
should enhance, not impair, our regional alliances.
    United States policy in Latin America is built upon a 
positive and constructive vision designed to advance freedom 
and prosperity. We promote democracy and the rule of law so 
that every citizen can decide what is best for him or herself 
and is guaranteed the right to claim his fair share of 
political freedom and economic opportunity. We promote free 
enterprise as a perpetual engine of growth. We are committed to 
working together with our neighbors to make things better for 
the poorest among us so that things can be better for all of 
us.
    We are working constantly to achieve our goals. We are 
working multilaterally with the United Nations, particularly in 
Haiti, and with the OAS throughout the hemisphere. With the 
strong support of President Bush at the Fort Lauderdale General 
Assembly of the Organization of American States in June, we 
joined with our neighbors in issuing the Declaration of 
Florida, which advances our agenda of democracy and transparent 
and accountable governments.
    We have also contributed significant resources to support 
the exercise of democracy in the more than a dozen countries 
that will be holding Presidential elections through the end of 
2006. That includes, among others, Haiti, Nicaragua, and 
Bolivia.
    Our economic engagement in the region is extensive and 
broad-based. United States trade with Latin America and the 
Caribbean exceeded $445 billion in 2004 and is growing this 
year at the rate of 10 percent. United States investment in 
Latin America, direct investment, exceeds $300 billion. We have 
free trade agreements with Mexico and Chile. Similar benefits 
will soon be extended to the CAFTA-DR countries. Negotiators 
are meeting this week in Cartagena, Colombia, with negotiators 
from Colombia, Peru, and Ecuador. We also hope to soon conclude 
a free trade agreement with Panama.
    The Millennium Challenge Account offers great promise to 
assist countries in making reforms necessary for long-term 
growth. Both Honduras and Nicaragua have completed MCA 
compacts.
    An estimated 30 percent of foreign direct investment flows 
into the region come from the United States. The United States 
accounts for more than 50 percent of multinational firms doing 
business in Latin America and the Caribbean.
    We would not be so bold as to claim that all of our goals 
have been met. There is still much to be done, but there has 
been progress in many areas. Today every country in the 
hemisphere save one has a democratic constitutional government. 
We have improved the basis for security cooperation in the 
hemisphere through a broad range of military-to-military 
engagement and security assistance programs. The percentage of 
the hemisphere's population, about 15 percent, living in 
extreme poverty is decreasing. Reducing poverty and increasing 
regional prosperity are key objectives and will be a focus of 
the Summit of the Americas, which will take place in November 
in Mar del Plata, Argentina.
    For its part, China has many reasons to be engaged in Latin 
America and the Caribbean. We see two major trends in Chinese 
engagement: First and foremost, growing trade and investment to 
fuel China's own rapid domestic development; second, China 
wants to match its growing economic strength with political 
influence. China is the world's seventh largest economy, the 
world's third largest trading nation, and a major destination 
for foreign direct investment from around the world. To sustain 
economic growth, China has become more engaged with the rest of 
the world, including Latin America.
    Chinese trade with Latin America is growing at around 25 
percent a year. China may become an important new investor in 
the region. Its total investment at the end of 2004 was only 
$8.3 billion. However, new pledged investments in 
infrastructure and natural resources could be a significant 
boost to the region if realized.
    Let me go back. Our investment in the region is $300 
billion. China's is about $8.3 billion. To give you a 
comparison, Spain's direct investment in the region is 
somewhere around $55 billion. China is also interested in 
matching its economic power with political influence. China's 
integration into the global economic and political community is 
now largely complete. We encourage China to act as a 
stakeholder in the international system of which it is a major 
beneficiary. We support China's engagement in the region in 
ways that create prosperity and promote transparency, good 
governance, and respect for human rights. We also want to 
ensure vital renewable resources, such as fisheries and 
forests, are used in a sustainable way.
    Given this subcommittee's interest in narcotics, let me 
touch for a minute on China's role in narcotics control in the 
region. China has a large and developed chemical industry and, 
like the United States, it is one of the world's largest 
producers of precursor chemicals; chemicals which have 
legitimate uses but are also used in the production of cocaine 
and synthetic drugs.
    China notifies the DEA of shipments of precursor chemicals 
to the United States and Mexico so that tracking may be done to 
prevent diversion of those chemicals for illicit purposes. 
Nevertheless, some precursor chemicals are, in fact, diverted 
from legal use to manufacturing methamphetamine destined for 
U.S. markets.
    We are following closely what appears to be expanding 
military-to-military contacts between China and countries in 
the region, and my colleague on the panel will address that 
more. As China considers arms sales to the region, we will 
apply our general policy of seeking transparency and 
accountability in these sales and are concerned about the risk 
of diversion of weapons to illegal armed groups.
    We do not have reliable figures for China's military 
assistance to the Western Hemisphere. However, we note that 
United States assistance is preconditioned on adherence to 
basic principles of good governance and transparency and we 
encourage China to adopt similar principles. I would also note 
that in comparison, United States military assistance dwarfs 
Chinese security assistance to the region.
    There is much that is complementary with China in our 
approach to the region and much on which we look forward to 
cooperating with them. As the President said on May 31, our 
relationship with China is complex, but in recent years we have 
been able to communicate often to address common challenges.
    Of course, we have differences with China on a variety of 
important issues, including human rights, nonproliferation, 
Taiwan, and some aspects of trade and finance, among others. We 
intend for our relationship with China to be based both on a 
realistic appraisal of our common interests and, equally 
important, a frank exploration of differences through dialog.
    Let me conclude with a couple of observations. First, our 
relationships with our neighbors in the Western Hemisphere are 
strong and stable, based on shared values, economic ties, and 
defense relationships. A strong, secure United States and a 
strong, secure, prosperous, and stable Western Hemisphere 
remains our goal and a continuing reality.
    Second, we must continue to work with our neighbors and 
with our partners around the world to ensure that China's 
development takes place within strong regional and global 
security, economic, and political arrangements. That is the 
policy articulated by President Bush, by Secretary Rice, and is 
a key objective of the United States-China senior dialog led by 
Deputy Secretary Zoellick. I assure you that in pursuing this 
goal our guiding principle remains to advance the interests and 
values of the United States of America.
    Thank you for this opportunity to testify. I would be 
pleased to take your questions.
    [The prepared statement of Ambassador Shapiro follows:]

 Prepared Statement of Charles S. Shapiro, Principal Deputy Assistant 
 Secretary, Bureau of Western Hemisphere Affairs, Department of State, 
                             Washington, DC

    Mr. Chairman, members of the Subcommittee on Western Hemisphere, 
Peace Corps, and Narcotic Affairs, I am pleased to appear before you 
this afternoon to discuss the diplomatic, political, and economic 
implications of China's engagement in Latin America and the Caribbean. 
China's emergence--its economic and political development, its 
engagement in a rules-based international world, its evolution as an 
interlocutor on security issues in Asia and beyond--will be an 
important opportunity and a key challenge for the United States over 
the next quarter of a century and beyond. To the extent that China's 
engagement promotes policies that contribute to the fundamental 
interests of the American People, we welcome that engagement.

              THE UNITED STATES IN THE WESTERN HEMISPHERE

    U.S. policy in Latin America has been built upon a positive and 
constructive vision designed to advance freedom and prosperity in the 
region. We have promoted democracy and the rule of law so that every 
citizen can decide what is best for him or herself, and is guaranteed 
the right to claim his fair share of political freedom and economic 
opportunity. We promote free enterprise as a perpetual engine of 
growth. We are committed to working together with our neighbors to make 
things better for the poorest among us so that things can be better for 
all of us.
    We pursue our many goals on a daily basis with our partners in the 
region. For example, we work multilaterally with the United Nations in 
places like Haiti and with the OAS throughout the hemisphere to further 
the interests shared by all the nations of the hemisphere. With the 
strong support of President Bush at the Fort Lauderdale meeting of the 
OAS General Assembly in June, we joined with our neighbors in the 
region to issue the ``Declaration of Florida,'' which among other 
things advances our agenda of delivering the benefits of democracy to 
ordinary citizens by making governments more effective, transparent, 
and accountable. We have also contributed significant resources to 
support the exercise of democracy in 13 countries that are holding 
elections in the year ahead.
    In November, Argentina will host the Fourth Summit of the Americas, 
where the focus will be on creating jobs. We are developing, in concert 
with the other 33 democratically elected governments in the hemisphere, 
a Summit Plan of Action that will meet this objective head on. We are 
striving for a plan of action that has meaningful initiatives, with 
measurable outcomes, designed to ensure that the summit has real 
meaning in advancing the welfare of the hemisphere's citizens. The role 
of governments is to help establish a framework in which the private 
sector can thrive; one that promotes more competitive economies, 
attracts investment and fosters private enterprise--small- and medium-
sized enterprises in particular. In 2004, at the Special Summit of the 
Americas in Monterrey, the hemisphere's leaders committed themselves to 
practical steps to boost economic growth and open economic opportunity 
to all. They agreed to strengthen and enforce property rights, lower 
barriers to remittances, remove obstacles to starting small businesses, 
and increase access to capital for small businessowners. And we have 
already seen results. For example, in the 22 Western Hemisphere 
countries (excluding the United States and Canada), the average time of 
starting a business has been reduced from 71 days in 2004 to 63 days in 
2005. A good start, but we hope to do much better. We will strive for 
similar, measurable outcomes in the upcoming summit.
    Our economic and trade links with countries in the region foster 
prosperity and promote democracy and the rule of law. The ties between 
economic opportunity and political empowerment are clear. Our economic 
relations are about breaking down entrenched interests, stigmatizing 
corruption, rewarding reforms that bolster competitiveness, and 
ensuring that the very poor have the tools they need to claim their 
fair share of economic opportunity.
    Our economic engagement in the region is extensive and broad-based. 
We have comprehensive trade and investment relationships with Mexico 
and Chile through existing free trade agreements; CAFTA-DR was just 
approved, and we hope to conclude an Andean free trade agreement, as 
well as one with Panama, in the near future. The Millennium Challenge 
Account offers great promise to assist countries in making the reforms 
necessary for long-term growth, and two of the first four countries to 
have MCA compacts--Honduras and Nicaragua--lie within our hemisphere. 
Of course, the heavy lifting in the region, as it should be, is done by 
the United States private sector. An estimated 30 percent of foreign 
direct investment flows into the region are from the United States, and 
the United States accounts for more than 50 percent of multinational 
firms doing business in the region.
    While we are not so bold as to claim all of our goals have been 
met--and there is still a lot to do--there has been progress in many 
areas. Today every country in the hemisphere, save one, has a 
democratic, constitutional government. We improved the basis for 
security cooperation in the hemisphere through a broad range of 
military-to-military engagement and security assistance programs. And 
the percentage of the hemisphere's population--about 15 percent--living 
in extreme poverty is decreasing, although the numbers of poor are 
increasing due to population growth and persistent income inequalities. 
Reducing poverty and increasing regional prosperity remain key 
objectives.

                    CHINA IN THE WESTERN HEMISPHERE

    We see two major trends in China's engagement with Latin America 
and the Caribbean. First and foremost, growing trade and investment are 
necessary to fuel China's own rapid domestic development. Second, China 
wants to match its growing economic strength with political influence 
in order to advance its own national agenda.

                       CHINA'S ECONOMIC INFLUENCE

    China is the world's fifth largest economy (with an economy about 
the same size as Italy's), the world's third largest trading nation, 
and a major destination for foreign direct investment from around the 
world. Its economy has grown at over 9.5 percent per year for the past 
25 years.
    Rapid growth and development are significant sources of legitimacy 
for the Chinese Communist Party. To sustain that growth, China has 
increasingly engaged with the rest of the world, including with Latin 
America, to secure inputs it needs and markets for its surging exports.
    China's demand for Latin American goods has helped fuel economic 
growth in many countries. At the same time, however, China's exports, 
especially in textiles, apparel, and shoes, pose stiff competition for 
some Latin American and Caribbean producers, primarily in third-country 
markets.

   China's imports from Latin America reached $22 billion in 
        2004 and are up 16 percent in the first half of this year. 
        Primary imports from Latin America include metal ores, 
        soybeans, and copper.
   China's exports to Latin America reached $18 billion in 2004 
        and were up an additional 32 percent in the first half of this 
        year. China's top exports to Latin America include machinery, 
        electronics, and apparel.
   While it is difficult to attribute what portion of overall 
        economic growth in Latin America is attributable to particular 
        factors, it is clear that China's boom has expanded markets for 
        Latin exports, and thus contributes to economic growth. For 
        example, the value of Chile's net exports to China more than 
        doubled in 2004, increasing by about $1 billion in a $94 
        billion economy.
   China is an important new investor in the region as it 
        searches for resources. Still Chinese investment is rather 
        small, at approximately $8.3 billion at the end of 2004, 
        according to Chinese data. And the lion's share of that sum 
        consists of investments in tax-haven countries, such as the 
        Cayman Islands and British Virgin Islands. However, deals for 
        future investments, primarily in infrastructure and extractive 
        sectors, could be a significant boost to the region if 
        realized.
   China is now the world's second largest consumer of 
        petroleum, and has become a net importer of oil. We believe 
        that securing reliable access to petroleum products from the 
        hemisphere is an important element of China's engagement in the 
        region, especially with Venezuela, Colombia, and Ecuador.

    In comparison, U.S. trade with, and investment in, the region dwarf 
China's, and is distinct from what China has to offer. We provide high-
tech and knowledge-based goods and services. U.S. trade with the region 
exceeded $445 billion in 2005, 10 times China's level; Latin America's 
exports to the United States are up 10 percent and imports from the 
United States are up 15 percent in the first half of this year. U.S. 
investment in Latin America is over $300 billion. The region needs and 
values our market and our expertise for its continued development.

                      CHINA'S POLITICAL INFLUENCE
 
   China is also interested in matching its economic power with 
political influence in the region. China's desire to compete with and 
ultimately isolate Taiwan diplomatically is a key factor in Latin 
America, home to 12 of the 26 countries that have diplomatic relations 
with Taiwan. China will continue to offer assistance to countries like 
Dominica and Grenada, which switched their recognition from Taipei to 
Beijing in March 2004 and January 2005 respectively.
    The Chinese are also skillfully employing ``visit diplomacy.'' On 
the margins of the APEC Summit in Santiago in November 2004, where 
President Bush and President Hu Jintao met, President Hu Jintao also 
visited Argentina, Brazil, Chile, and Cuba. Hu promised tens of 
billions of dollars for improving infrastructure--again, mainly to 
improve access to, and transport of, raw materials.
    In December 2004, Venezuelan President Hugo Chavez visited Beijing, 
signing agreements that would increase China's investment in 
Venezuela's oil sector and boost bilateral trade, which, as Chavez 
stated, could reach $3 billion in 2005, more than double the total for 
2004.
    In January and February 2005, Vice President Zeng Qinghong visited 
Mexico, Venezuela, and Peru, and attended the opening ceremony of the 
first ministerial-level meeting of the China-Caribbean Economy and 
Trade Cooperation Forum 2005 in Kingston.
    En route to the United Nations General Assembly in New York, 
President Hu Jintao recently visit Canada and Mexico, and on September 
12 signed several trade agreements on such areas as tourism, taxes, and 
agriculture. President Hu Jintao also promised to take action against 
illicit Chinese commerce arriving in Mexico.
    Apart from its diplomatic competition with Taiwan, we believe China 
should step up to global responsibilities commensurate with the 
benefits that it derives from being both a member and a stakeholder in 
international systems and organizations. For our part, one of the most 
important foreign policy goals of seven American Presidents--over 30 
years--has been to engage China in a way that helps it peacefully and 
responsibly integrate into the international system. As Secretary Rice 
said in her March 19 speech in Tokyo, the United States ``welcomes the 
rise of a confident, peaceful, and prosperous China . . . [and wants] 
China as a global partner,'' but one that is ``able and willing to 
match its growing capabilities to its international responsibilities.'' 
We also seek a China that is moving toward greater openness and rule of 
law at home, though it clearly has a long way to go.
    China's integration into the global economic and political 
community is now largely complete. It has a permanent seat on the U.N. 
Security Council, is a WTO member, is active in the World Bank and IMF, 
interacts with the G-7 and G-8, plays a strong role in a number of 
regional bodies such as APEC and ASEAN, has contributed significantly 
to Asian security through the Six Party Talks, and has permanent 
observer status in the OAS.
    We support China's engagement in the region in ways that create 
prosperity and promote transparency, good governance, and respect for 
human rights. We also want to ensure vital natural resources, such as 
fisheries and forests are used in a sustainable way. China's 
determination to achieve energy security is an important aspect of its 
global outreach, and it is critical that China understand the 
fundamentals of global energy markets. But equally important, we need 
to work with China and with our friends and allies to ensure that every 
effort is taken to promote policies that converge with our interests. 
We will continue to monitor China's presence in the region to ensure 
this is the case--that its presence does not detract from our goals of 
prosperity, democracy, and respect for human rights.
    We expect that China's increasing engagement in the region will 
lead to increased cooperation between China, the United States, and 
other Latin American and Caribbean governments on matters affecting 
regional stability, especially terrorism; transnational crime, and 
counternarcotics. We view positively China's participation in the U.N. 
peacekeeping mission in Haiti in a way that contributes to the mission.

                   CHINA'S ROLE IN NARCOTICS CONTROL

    Given this subcommittee's interest in narcotics, let me elaborate 
on China's role in narcotics control in the region. China has a large 
and developed chemical industry, and, like the United States, it is one 
of the world's largest producers of precursor chemicals, which have 
legitimate uses but are also used in the production of cocaine and 
synthetic drugs. In particular, China is the world's leading exporter 
of bulk ephedrine (used in cold medicines and weight loss tablets) and 
a source country for much of the ephedrine and pseudoephedrine imported 
into Mexico.
    China notifies the DEA of shipments of precursor chemicals to the 
United States and Mexico so that tracking may be done to prevent 
diversion of these chemicals for illicit purposes. Nevertheless, some 
precursor chemicals are diverted from legal use to manufacture 
methamphetamine destined for the United States.
    To regulate its chemical industry, China is a party to the 1988 
U.N. Drug Convention and has regulations for recordkeeping and import/
export controls on all chemicals included in the Convention. Several 
provinces have more stringent controls than called for in the 
Convention. In the State Department's International Narcotics Control 
Strategy Report we have noted, however, that China needs to improve its 
infrastructure to adequately monitor its large chemical production 
capacity and international trade in chemicals.
    United States and Chinese cooperation in chemical control and 
counternarcotics is good and has been steadily improving. This was 
highlighted by a joint operation involving the DEA and several PRC law 
enforcement agencies in October 2004, leading to the world's largest 
seizure of the synthetic drug Mandrax (18 metric tons), and the seizure 
of 10 tons of pseudoephedine tablets (a key precursor for 
methamphetamine) in Los Angles in September 2004. While China is a 
transit country for heroin produced in Southeast Asia to international 
markets, the DEA's Heroin Signature Program indicates less than 1 
percent of heroin seized in the United States comes from Southeast 
Asia.

                       CHINA'S MILITARY INFLUENCE

    We have noted, and are following closely, what appear to be 
expanding military-to-military contacts between China and countries in 
the region. You may recall that in previous testimony before Congress, 
General Bantz Craddock of the United States Southern Command noted that 
national-level defense officials from China made 20 visits to Latin 
America and the Caribbean, while Defense Ministers and Chiefs of 
Defense from nine regional countries have visited China. In addition, 
we are watching closely increased educational exchanges between China 
and several Latin American and Caribbean countries, and seek to ensure 
that they do not undermine the commitment of Latin American militaries 
to democracy and civilian control. As China considers arms sales to the 
region, we will apply our general policy of seeking transparency and 
accountability in these sales and are concerned about the risk of 
diversion of weapons to illegal armed groups, which threaten the peace 
and security of the hemisphere.
    We do not have reliable figures for China's military assistance in 
the Western Hemisphere. However, we note that U.S. military assistance 
is preconditioned on adherence to basic principles of good governance 
and transparency, and we encourage China to adopt similar principles. 
In comparison, U.S. military assistance, incorporating article 98 
restrictions, dwarfs China's security assistance to the region.

                          OVERALL RELATIONSHIP

    There is much that is complementary with China in our approach to 
the region and much on which we look forward to cooperating with them. 
As the President said on May 31, our relationship with China is 
complex, but, at least in recent years, we have been able to 
communicate often--in remarkably candid and direct fashion, when 
necessary--and to address common challenges--regional and global, 
economic and political. Of course, we do have differences with China on 
a variety of important issues, including human rights, 
nonproliferation, Taiwan, and some aspects of trade and finance, among 
others. Let me say again that we intend for our relationship with China 
to be based both on a realistic appraisal of our common interests and 
equally important, a frank exploration of differences through dialogue.
    China's growth and development have naturally brought growing 
relationships with traditional U.S. allies in the region. This does not 
diminish U.S. influence or capabilities. U.S. policy toward Latin 
America is anchored in our strong and enduring alliances, which 
continue to provide unprecedented stability and prosperity in the 
region. Our allies throughout Latin America believe good United States-
China relations are important to global peace, prosperity, and 
stability. Our efforts to work with China should enhance, not impair, 
our regional alliances.

                        SOME FINAL OBSERVATIONS

    Let me conclude with a couple of observations.
    First, our relationships with our neighbors in the Western 
Hemisphere are strong and stable, based on our shared values, economic 
ties, and defense relationships with the countries of the region. A 
strong, secure United States in a strong, secure, prosperous, and 
stable Western Hemisphere remains our goal, and a continuing reality.
    Second, we must continue to work with China, and with our partners 
around the world, to ensure that China's development takes place within 
strong regional and global security, economic and political 
arrangements. This is the policy articulated by President Bush and 
Secretary Rice, and is a key objective of the United States--China 
Senior Dialogue led by Deputy Secretary Zoellick. I assure you that in 
pursuing this goal, our guiding principle remains to advance the 
interests and values of the United States.
    Thank you for this opportunity to testify. We would be pleased to 
take your questions.

    Senator Coleman. Thank you, Ambassador Shapiro, for that 
optimistic presentation.
    Mr. Pardo-Maurer.

STATEMENT OF ROGELIO PARDO-MAURER, DEPUTY ASSISTANT SECRETARY, 
WESTERN HEMISPHERE AFFAIRS, DEPARTMENT OF DEFENSE, WASHINGTON, 
                               DC

    Mr. Pardo-Maurer. Thank you, Mr. Chairman. I am delighted 
to see Senator Nelson here, whose State has such an important 
relationship with Latin America. In fact, Senator Nelson's 
appearance tempts me to take the risk of straying from my 
prepared remarks and perhaps beg a question from the Senator, 
based on a reflection.
    The last year was a big year for the People's Republic of 
China, or the last year or so. They can rightly take pride in 
having placed second in gold medals at the Olympics. They 
placed troops in the Western Hemisphere, participating in the 
U.N. force in Haiti, and they put a man in space, or two men, I 
think it was. There is no question but that transforms the view 
of the world, not only of those people who are so fortunate as 
to have been able to look at our planet from that perspective, 
but of the entire nation.
    So, no question their views of their world, and their place 
in it, are evolving, and it is only natural that our inquiry 
here should take that into account and see how we can influence 
those views. I take this hearing as an opportunity to do so, so 
I am delighted to see you here. Thank you, sir.
    China was only, yesterday, a marginal presence in our 
neighborhood, but now it is a growing feature of this new 
geostrategic map. At the 2004 APEC summit in Chile, President 
Hu of China thrilled the region by raising expectations that 
China would invest $20 billion, at least, and by some media 
reports up to $100 billion, over the next decade.
    This was widely heralded in Latin America as signaling the 
arrival of a new age, and certainly as perceived by the Latin 
Americans, President Hu's tour through the Americas was all the 
more remarkable for having attracted scant comment in the 
United States.
    We can expect Beijing's influence in the Western Hemisphere 
to grow considerably over the next decade. China offers Latin 
America and the Caribbean what some may see as alternatives or 
counterweights to the democratically accountable free markets 
which are the cornerstone of the inter-American system as we 
know it today.
    Our objective, as Ambassador Shapiro has pointed out, 
should be to ensure that China's rise as a commercial power in 
the Americas opens economic opportunity for all and raises the 
standard of living of all our peoples, while strengthening 
mutual trust and security and helping to consolidate the rule 
of law and democratic institutions in what Michael Novak, a 
scholar of the Americas, has called ``this hemisphere of 
liberty.''
    To the extent that China's rising political, economic, and 
strategic competitiveness is not properly addressed or 
understood, it harbors the potential to sow discord between the 
United States and the People's Republic of China and the 
region.
    China is still in the early stages of its quest for global 
influence. I might add there were few people who, even a few 
years ago, realized that China was pursuing a global strategy. 
The rules of the game are evolving. To be helpful, the rules 
should help us distinguish clearly the things that are threats 
from the things that are not threats. They should help sort out 
diplomatic and commercial pursuits from strategic pursuits. 
They should inject predictability into the system, create 
efficiencies and economies, and avoid misunderstandings.
    Ultimately, good rules should help identify those areas in 
which we can and should cooperate with China and our regional 
partners. The evidence suggests that in this hemisphere China 
is not unresponsive to United States sensitivities, but only 
when those sensitivities are made evident. So this process is 
unfolding as we speak and it is not surprising, therefore, that 
our understanding of China's role in the Western Hemisphere is 
evolving. That is why this hearing is so important and why I 
commend you on the spirit in which it is held.
    To start with the things that we do not know, there appears 
to be no consensus among the experts as to whether China's 
policy toward the Western Hemisphere is informed by an 
authoritative long-term strategy, by short-term tactics, or 
some pragmatic mixture of both. I would suggest that our 
understanding would benefit further if this inquiry were to 
explore the broader context of China's activities in the 
Americas, and if your colleagues were to pose the same 
questions being asked here, today, to our specialists for other 
important regions--Africa, the Middle East, Central Asia, South 
Asia, and East Asia.
    With few exceptions, the United States is the security 
partner of choice for the nations of the Americas. We should 
not take this for granted. It was not accomplished overnight or 
by shirking from difficult, and at times, thankless tasks. The 
friendly defense relations between the United States and the 
nations of the Americans are the product of hard work by 
generations of civilian officials of the U.S. Government and by 
the men and women of our Armed Forces. Our goal should be to 
maintain these privileged and longstanding relationships.
    The importance of the Latin American democratic revolution 
of the 1980s and 1990s to sustaining our friendly defense 
relations in the Americas cannot be overstated. The virtual 
disappearance in this hemisphere of interstate military 
rivalry, so recently the bane of the continent, is one of the 
most cherished accomplishments of the democratic revolution. By 
virtually any indicator, Latin America and the Caribbean, 
today, comprise the least militarized region of the world.
    This means that the United States is able to approach Latin 
America and the Caribbean as a, ``economy of force,'' theater. 
We want to keep it that way. The strength of our economic and 
cultural ties with our neighbors permit us to maintain a 
strategic posture that requires a relatively and indeed 
historically small investment of military forces and security 
assistance.
    This positive situation should be seen as one of the core 
strategic assets of the United States. Should another actor 
attempt to become a serious competitor for military influence 
and cooperation in the region, an effective response by the 
United States could become much more costly.
    Our relationship with each country is different and is 
conducted on unique terms. Nevertheless, throughout the region 
our friendship is reflected in the entire range of military 
cooperation, in operations, exercises, training, equipment, 
education, doctrines, even uniforms, and, for lack of a better 
term, elan.
    We do not see China as directly competitive in this area. 
There is no evidence of Chinese interest in establishing a 
continuous military presence in the region, nor is there 
evidence that Chinese military activities in the Western 
Hemisphere, including arms sales, at this time pose a direct 
conventional threat to the United States or its friends and 
allies.
    That is not to say, however, that there are no concerns, 
and in particular we need to be alert to rapidly advancing 
Chinese capabilities, particularly in the fields of 
intelligence, communications, and cyber warfare, and their 
possible application in the region. We continue to be concerned 
about China's capabilities or activities in these areas. As I 
noted in my recent testimony to the House International 
Relations Committee, we encourage other nations in the 
hemisphere to take a close look at how such activities could 
possibly be used against them or the United States.
    I hope this testimony will stimulate a discussion and 
better understanding of China's changing role in the world and 
its long-term implications for the United States and that it 
will stimulate a discussion of how closely the national 
security of the United States remains linked to the security of 
the Western Hemisphere. Global, hemispheric, and homeland 
security are a continuum, not discrete spheres, and our 
security is ultimately tied to the advancement of economic 
opportunity and democracy in this hemisphere.
    Indeed, these interconnections are what inform U.S. policy 
toward the hemisphere. We must recognize that China and the 
United States will compete for trade opportunities and that 
competition can itself benefit the nations of this hemisphere. 
But we must remain mindful that China also has its own set of 
political, economic, and military interests, requiring us to 
carefully distinguish between legitimate commercial initiatives 
and the possibility of political or diplomatic efforts to 
weaken the democratic alliances we have forged.
    So, above all, I hope this hearing will challenge any 
complacent belief that our enduring vision of the new world as 
a land of freedom and opportunity for all can somehow be 
conceived in isolation from our long-term strategic interests.
    Thank you.
    [The prepared statement of Mr. Pardo-Maurer follows:]

    Prepared Statement of Rogelio Pardo-Maurer IV, Deputy Assistant 
     Secretary, Western Hemisphere Affairs, Department of Defense, 
                             Washington, DC

    This month's visit by Chinese President Hu Jintao to Mexico 
underscores China's increasing interest and involvement in the Western 
Hemisphere and makes it appropriate and timely for this committee to 
inquire what these developments mean for a region of such importance to 
the United States.
    China, only yesterday a marginal presence, is now a growing feature 
of the new geostrategic map of our neighborhood. At the 2004 APEC 
Summit in Chile, President Hu thrilled the region by raising 
expectations that China would invest $20 billion, and by some media 
reports, up to $100 billion over the next decade. This was widely 
heralded in Latin America as signaling the arrival of a new age. As 
perceived by the Latin Americans, President Hu's tour through the 
Americas was all the more remarkable for having attracted scant comment 
in the United States.
    We can expect Beijing's influence in the Western Hemisphere to grow 
considerably over the next decade. China offers Latin America and the 
Caribbean what some may see as alternatives or counterweights to the 
democratically accountable, free markets which are the cornerstone of 
the Inter-American system as we know it today.
    Our objective should be to ensure that China's rise as a commercial 
power in the Americas opens economic opportunities for all and raises 
the standard of living of all our peoples, while strengthening mutual 
trust and security, and helping to consolidate the rule of law and 
democratic institutions in what scholar Michael Novak has called ``this 
Hemisphere of Liberty.''
    To the extent that China's rising political, economic, and 
strategic competitiveness is not properly addressed or understood, it 
harbors the potential to sow discord between the United States and the 
PRC and within the region.
    China is still in the early stages of its quest for global 
influence. The ``rules of the game'' are evolving. To be helpful, the 
rules should help us distinguish clearly things that are threats, from 
things that are not threats. They should help sort out diplomatic and 
commercial pursuits from strategic pursuits, inject predictability into 
the system, create efficiencies and economies, and avoid 
misunderstandings. Ultimately, good rules should help identify those 
areas in which we can and should cooperate with China and our regional 
partners.
    The evidence suggests that, in this hemisphere, China is not 
unresponsive to U.S. sensitivities--but only when those sensitivities 
are made evident.
    This process is unfolding as we speak. It is not surprising, 
therefore, that our understanding of China's role in the Western 
Hemisphere is evolving. That is why this hearing is so important, and 
why I commend this committee on the spirit of inquiry in which it is 
held.
    This inquiry would do well to concern itself with:

   The competitive potential of a nondemocratic, extra-
        hemispheric system, with vast and growing resource 
        requirements;
   What these developments mean for the fragile internal 
        equilibriums of democracies for whom the United States is at 
        present the political, economic, and strategic ``partner-of-
        choice'';
   The potential for misunderstandings; and,
   Intelligence gaps and things we do not know.

    To start with the things we do not know, there appears to be no 
consensus among the experts as to whether China's policy toward the 
Western Hemisphere is informed by an authoritative long-term strategy, 
by short-term tactics, or some pragmatic mixture of both.
    This lack of consensus necessarily injects a tentative note in our 
discussions, and our vision of a way ahead. It simply may be that 
China's approach to the Western Hemisphere must be understood as a 
complex and evolving process.
    The drivers of China's policy toward the Western Hemisphere 
specifically, appear to be, in no particular priority: (1) The 
isolation of Taiwan; (2) the cultivation of new sources of energy, raw 
materials, and foodstuffs; (3) the quest to open new export markets, 
and (4) the recruitment of allies to diminish U.S. influence and build 
a ``multipolar'' world order. Also noteworthy is the desire for new 
technologies, as exemplified by the ambitious Sino-Brazilian 
partnership for development of earth reconnaissance satellites and the 
exploration of space.
    Our understanding would benefit further if this inquiry were to 
explore the broader context of China's activities in the Americas, and 
pose the same questions being asked here today, to our specialists for 
other important regions: Africa, the Middle East, Central Asia, South 
Asia, and East Asia.
    With few exceptions, the United States is the security partner of 
choice of the nations of the Americas. We should not take this for 
granted. It was not accomplished overnight or by shirking from 
difficult, and at times thankless, tasks. The friendly defense 
relations between the United States and the nations of the Americas are 
the product of the hard work by generations of civilian officials of 
the U.S. Government and by the men and women of our Armed Forces. Our 
goal should be to maintain these privileged and longstanding 
relationships.
    The importance of the Latin America's Democratic Revolution of the 
1980s and 1990s to sustaining our friendly defense relations in the 
Americas cannot be overstated. The virtual disappearance in this 
hemisphere of interstate military rivalry--so recently the bane of the 
continent--is one of the most cherished accomplishments of this 
Democratic Revolution. By virtually any indicator, Latin America and 
the Caribbean today comprise the least militarized region of the world.
    This means that the United States is able to approach Latin America 
and the Caribbean as an ``economy of force'' theatre. We want to keep 
it that way. The strength of our economic and cultural ties with our 
neighbors permit us to maintain a strategic posture that requires a 
relatively (and historically) small investment of military forces and 
security assistance. This positive situation should be seen as one of 
the core strategic assets of the United States. Should another actor 
attempt to become a serious competitor for military influence and 
cooperation in the region, an effective response by the United States 
could become more costly.
    Our relationship with each country is different and is conducted on 
unique terms; nevertheless, throughout the region our friendship is 
reflected in the entire range of military cooperation: Operations, 
exercises, training, equipping, education, doctrine, even uniforms and, 
for lack of a better term, elan.
    We do not see China as directly competitive in this arena. There is 
no evidence of Chinese interest in establishing a continuous military 
presence in the region. Nor is there evidence that Chinese military 
activities in the Western Hemisphere; including arms sales, at this 
time pose a direct conventional threat to the United States or its 
friends and allies.
    This is not to say, however, that there are no concerns. In 
particular, we need to be alert to rapidly advancing Chinese 
capabilities, particularly in the fields of intelligence, 
communications, and cyberwarfare, and their possible application in the 
region. We continue to be concerned about China's capabilities or 
activities in these areas. As I noted in my recent testimony to the 
House International Relations Committee, we encourage other nations in 
the hemisphere to take a close look at how such activities could 
possibly be used against them or the United States.
    I hope this testimony will help stimulate discussion and a better 
understanding of China's changing role in the world and its long-term 
implications for the United States.
    I also hope this testimony will stimulate a discussion of how 
closely the national security of the United States is linked to the 
security of the Western Hemisphere. Global, hemispheric, and homeland 
security are a continuum, not discrete spheres, and our security is 
ultimately tied to the advancement of economic opportunity and 
democracy. Indeed, these interconnections are what inform U.S. policy 
toward the Western Hemisphere.
    We must recognize that China and the United States will compete for 
trade opportunities and that competition can itself benefit the nations 
of this hemisphere. But we must remain mindful that China also has its 
own set of political, economic, and military interests, requiring us to 
carefully distinguish between legitimate commercial initiatives and the 
possibility of political or diplomatic efforts to weaken the democratic 
alliances we have forged.
    Above all, I hope this hearing will challenge any complacent belief 
that our enduring vision of the New World, as a land of freedom and 
opportunity for all, can somehow be conceived in isolation from our 
strategic interests.

    Senator Coleman. Thank you.
    First, an observation. I have a very strong belief that as 
we look into the next decade and decades to come; as we see a 
Europe that is eliminating trade barriers and political 
divisions and trying to develop a unified economic strength; as 
we see the emergence of a growing China; a growing India; that 
ultimately our ability as the Western Hemisphere to work 
together to take advantage of the resource opportunities that 
we have, of the labor opportunities, our future lies in working 
together as a hemisphere. We must build upon what I get from 
both of you gentlemen, which is an optimistic assessment based 
on the longstanding ties between the United States and Latin 
America and Central America.
    One of my concerns, though, is what Ambassador Shapiro 
talked about: China's growing economic strength with political 
influence. My question then is about that political influence. 
The nature of democracy in Central America and Latin America is 
still fragile; concerns obviously that many of us have about 
the direction that Venezuela has taken, the political 
instability in Peru, the rise of the cocaleros and what is 
happening in Bolivia with an election coming soon, in Nicaragua 
the Bolanos administration being squeezed by Ortega on the left 
and Aleman on the right.
    With that concern about the fragility of what you have both 
reflected upon--the democratic revolution, Mr. Pardo-Maurer, 
that you talked about--for a country that does not have a deep 
and abiding commitment to democratic principles, can we talk a 
little bit about your perspective of Chinese foreign policy 
objectives when it comes to Latin America? Do we see any 
involvement in some of the political divisions that were being 
played out in some of the countries that I have talked about?
    How would you describe China's goal or their vision when it 
comes to some of the challenges that democracy is facing in 
Central America and Latin America?
    Ambassador Shapiro. Mr. Chairman, I am going to defer to my 
colleague here, who is an expert on China whom I brought along, 
Mr. Forden from East Asian and Pacific Affairs Bureau of 
Department of State.
    Senator Coleman. Mr. Forden.
    Mr. Forden. Thank you, Mr. Chairman.
    Well, I am not an expert on the political dynamics of Latin 
American countries, so I would defer to Ambassador Shapiro on 
the effects of China's foreign policy or potential effects in 
the domestic political scene. But in terms of China's foreign 
policy on Latin America in general, we do not see any evidence 
that China has a concerted policy or interest in intervening in 
the domestic political dynamics in these countries that you 
mentioned.
    I think primarily from our point of view what China is 
looking at is growing economic ties to these countries, 
opportunities to secure access to resources that they need to 
fuel their domestic economic development, opportunities to seek 
access and expanded access to markets for their exports of 
their goods, and a foreign policy in this hemisphere which is 
mostly designed to secure and maintain good relationships with 
those countries in Latin America, with the primary purpose of 
maintaining and securing their economic ties.
    Ambassador Shapiro. If I may add to that, Mr. Chairman, 
these markets in Latin America are important to us and they are 
of increasing importance to China, both as a market for Chinese 
exports and as a place where they purchase the things that they 
need. To the extent that that trade is taking place in an open 
manner with a level playing field, to the extent that Latin 
American countries are wealthier from selling their exports to 
China, those countries are going to be more stable and they are 
going to, in turn, be better trade partners for the United 
States as well. There is no reason why China should not be 
involved in Latin America the way that other economic powers, 
we hope, will not only trade with Latin America, but Latin 
America will trade among itself.
    Senator Coleman. Mr. Pardo-Maurer.
    Mr. Pardo-Maurer. Mr. Chairman, I concur with the remarks 
of both of my colleagues and I would add the following. We do 
need to be alert to the possibility of a sort of Gresham's law 
working here, where the bad money drives out the good. As 
Ambassador Shapiro said, what is important is that there be a 
level playing field. The fact is that American, United States, 
commercial relations with Latin America are embedded within a 
much larger context than merely economic considerations. We 
have a human rights component to our diplomacy. We have 
cultural aspects to our diplomacy. There is all kinds of other 
things that go on within the context of our economic relations.
    What is more, I would argue that our relationship, the 
relationship of United States businessmen with Latin American 
businessmen, is one that also takes place within a larger 
social context. So from that point of view there is something 
very real out there, which we call the Inter-American System, 
that is undergirded not only by binding institutions between 
governments, but by ethics and mores and a common vision of the 
world.
    China is not part of that system at all. It is not a 
democracy, it is not a place where you can speak freely. It is 
a place, as my colleague indicated, whose interests in Latin 
America are economic. So from that point of view, we need to be 
sure that we are able to work with the Inter-American System so 
that China is competing on a level playing field.
    What is the equivalent of the Corrupt Foreign Practices Act 
that should restrict businesses from not bribing businesses or 
governments in other countries for contracts and so forth? What 
is the equivalent of Rotary Club or Kiwanis or any of these 
many other organisms of civil societies that act as watchdogs 
and that shape the behavior of the business community?
    These exist in Latin America and the degree of development 
of civil society in each country is different, and, therefore, 
a one-size-fits-all approach will not necessarily work. But I 
think by working together within the Inter-American System we 
can help bring China in as a constructive partner that builds 
up institutions and ultimately is a more constructive player on 
the world stage. So I think we need to keep that in mind.
    Senator Coleman. Thank you.
    Senator Nelson.
    Senator  Bill Nelson. Ambassador Shapiro, given that we 
import 13 percent of our daily consumption of oil from 
Venezuela, what is going on between China and Venezuela and how 
is that going to affect us?
    Ambassador Shapiro. Thank you for the question, Senator. I 
have to note that we talked about this in Caracas as we were 
jogging through the neighborhoods around my house.
    Senator Bill Nelson. And that was 2 years ago.
    Ambassador Shapiro. That was 2 years ago.
    What Venezuela supplies China is primarily ``orimulsion,'' 
which is a hybrid fuel developed in Venezuela, a mixture of 
bitumen and water, that is used in powerplants. I think at the 
peak our estimate was that they were selling 100,000 barrels a 
day of orimulsion. Right now it looks like it is at about 
40,000 barrels a day of orimulsion.
    The China National Petroleum Company has a joint venture 
with PDVSA, the Venezuelan oil company, to produce this 
orimulsion. PDVSA has opened an office in Beijing and China is 
active in Venezuela.
    But the one thing I would like to note is that the Chinese 
Ambassador to Venezuela, in a press interview with the 
Venezuelan press, noted China's interest in furthering its 
energy relationship with Venezuela, but went on to note that 
China does not seek to replace the United States market, adding 
that North and South America are Venezuela's natural markets.
    Senator Bill Nelson. When was that statement made?
    Ambassador Shapiro. It was made earlier this year, Senator.
    Our ports in the gulf are 4 days away from Venezuela. 
China's ports are, I think, 3 weeks away from Venezuela.
    Senator Bill Nelson. How do you square that statement with 
the statements of the President of Venezuela threatening to cut 
off oil to the United States?
    Ambassador Shapiro. Venezuela sells the United States 
somewhere around 1.4 million barrels a day of oil, primarily to 
its own subsidiary, Citgo. The United States does not buy oil 
from countries. We buy oil from companies. Companies import 
that oil. That is a market-driven decision that is in the 
interest of both the seller, like any market-driven decision, 
and in the interest of the buyer.
    Our refineries on the gulf coast are designed to refine 
Venezuelan crude oil, which is very heavy and has a high 
sulphur content. At this point Chinese refineries cannot 
process that oil.
    Senator Bill Nelson. How long would it take them to develop 
those refineries?
    Ambassador Shapiro. They could do that. It would require an 
investment of billions of dollars and would take--I cannot give 
you an exact date because it would depend upon how much money 
they are willing to put into it, not just in refineries, but 
also in tanker capacity to transport that oil from Venezuela to 
China. It is 4 days sailing time to the United States and 20 
days sailing time to China. Obviously, you need five times as 
many tankers to carry the same amount of fuel to China.
    Senator Bill Nelson. So your conclusion and advice to this 
committee, then, is that despite the bombastic statements by 
Hugo Chavez, President of the Bolivarean Republic of Venezuela, 
it would be impractical for him to suddenly cut off his oil 
shipments to the United States and look elsewhere on the world 
market, particularly to China?
    Ambassador Shapiro. He could do it. The world markets would 
adjust. It would be very expensive for Venezuela. It would be 
very expensive for the United States.
    Senator Bill Nelson. Mr. Chairman, thank you. I have got to 
go on to another hearing. We have Max Mayfield up there. We 
have got a hurricane ravaging across Key West as we speak.
    I have asked my questions with a certain edge on my words, 
but I am one of the people who wanted to have a good 
relationship with the leader of Venezuela. The Ambassador and I 
have talked long and hard, and yet I have been very upfront and 
critical of the Chavez government. I am disappointed because I 
thought that our relationship with Venezuela would get better, 
but it got worse because of the rhetoric that came out of 
Venezuela.
    Your comments have been most helpful in light of the 
rhetoric that we have heard.
    Senator Coleman. I appreciate your concern, Senator Nelson. 
I had a chance to visit with President Chavez and he had made 
the comment to me that: I could cut oil off from Citgo just 
like that. My comment was: You could cut off your left arm, 
too; would you feel better? I think it would hurt. I think it 
would hurt.
    Certainly what I am hearing today is about the realities of 
space, distance, market, production, a range of other things. 
That is something, at least for today, we are not going to lose 
a lot of sleep over. But again, these are things worth keeping 
an eye on. So I appreciate your concerns. Thank you, Senator.
    Let me continue by talking about the military foreign 
affairs perspective, and then I am going to move on to some 
other issues. But I believe, Ambassador Shapiro, in your 
written testimony I recall a concern being raised about, ``As 
China considers arms sales to the region, we will apply a 
general policy of seeking transparency and accountability in 
these sales, and are concerned about the risk of diversion of 
weapons to illegal armed groups which threaten the peace and 
security of the hemisphere.''
    Either to the Ambassador or to Mr. Pardo-Maurer: I would be 
interested if you can tell us what groups are we talking about 
and how serious is that concern?
    Ambassador Shapiro. Senator, that is a general concern 
about all arms sales anywhere in the world. But my concern is 
this area of the world. At this point in time, I believe that 
China's sales to the Western Hemisphere are somewhere around 2 
percent of total purchases by Latin American and Caribbean 
countries. So it is quite small.
    That said, we are in touch with the Chinese. We are working 
with the Chinese. We want to ensure that those sales are 
transparent, that they go to the intended users and do not get 
diverted to illegal armed groups anywhere.
    Senator Coleman. Mr. Pardo-Maurer, anything to add to that?
    Mr. Pardo-Maurer. As Ambassador Shapiro said, that is a 
general concern. There are other countries that are selling 
weapons to specific countries in Latin America. I could cite 
Russia with Venezuela, that we have repeatedly, repeatedly, at 
the highest levels expressed our concerns to and our desire 
that they work within the established procedures for 
transparency and confidence and security-building measures of 
the Inter-American System.
    As a general principle, I would say the smaller the items 
sold the greater our concern. It is much harder to keep track 
of a single round than it is to keep track of an aircraft 
carrier. To the degree that China is pursuing military 
relationships with the region, we have to think in terms of 
where are we going to be 5, 10, and 15 years from now. That is 
the way they think. We are told that they have a 50-year plan. 
We do not know if that is true. We do not know if that is what 
it is.
    But suppose they do have a 50-year plan? In that sort of 
scenario, everything we have been talking about--their energy 
relationships, their diplomatic relationships, even their 
cultural and demographic relationships--take and a different 
light.
    Senator Coleman. I am going to spend a little more time 
with the second panel talking about article 98 agreements that 
we have and the impact that is having on our IMET training of 
military personnel in Latin America. When I was in Brazil, 
Uruguay, Chile just a couple weeks ago, those issues came up 
consistently. We are losing the ability to strengthen the 
military-to-military contacts because of some of the concerns 
about article 98 and the inability then to continue on with 
IMET training.
    Do you see a void being created by that, and is anyone 
rushing to fill the void? In particular, is China looking to 
fill the void?
    Ambassador Shapiro. We are supportive of concluding article 
98 agreements in those countries where we do not have them. We 
think that it is important. We do not perceive a void. I want 
to avoid that word. We are continuing to work to the extent 
that we can.
    The number of Latin American students who go to China to 
study each year is minimal. I saw an estimate that was under 50 
total regionwide. I think 2,500 Latin American students, 
military students, were in the United States last year at 
various military schools. The same thing applies to our 
military assistance personnel in U.S. Embassies and to military 
sales. ``Void'' is not a word that I would use, sir.
    Senator Coleman. Mr. Pardo-Maurer, do you want to add? Is 
``void'' too harsh a word, too strong a word?
    Mr. Pardo-Maurer. What I would say is that we have 
different types of relationships with different countries and 
in some countries we have very, very active, important 
relationships where we are working on solving serious problems 
that affect us both. Colombia and the United States would be a 
good example. We have an agreement with Colombia.
    We aim to have good relations with all the countries in the 
region. The article 98 agreement is a way to ensure that our 
service members will not be subject to kangaroo courts and 
governments that change depending on the weather. This has 
happened before in Latin America.
    So I think the concerns we are seeking to address by 
article 98 are very, very, very important concerns. When we 
lose our ability to provide material or perhaps even more 
importantly in the case of Latin America, where relationships 
are such an essential part of our military engagement, then, 
yes, we have to counterbalance that. It was never an easy 
decision. It was never an easy decision.
    Where we have probably seen the most difficult situation is 
with regard to IMET, the money that we use for training. There 
is no question but that this has made it much more difficult to 
bring qualified Latin American officers and enlisted men to the 
United States to train. That is an extremely important part of 
our relationship.
    I would not say that I have seen other countries rushing to 
fill a void or whatever you want to call it, but it has led 
other countries to look elsewhere. There is no question that 
China is ramping up its cooperation. They have established what 
is the largest Latin American studies program in the world. 
That is new. Who knows what may happen 1 or 2 or 3 years from 
now with military relationships?
    It is not just China. Venezuela and Cuba are offering 
alternatives for training, not in the military field, but Cuba 
just recently graduated 12,500 Latin American students in--they 
call them doctors; we would call them paramedics. But 
nonetheless, they are training professionals to deal with 
health issues that are not being addressed in the countries 
where these students came from.
    So our ability to develop relationships has been hampered, 
there is no question.
    Senator Coleman. I would say, first of all, I fully 
understand the concerns that are reflected in the article 98 
agreements and the protection that we are looking to afford to 
American service men and women, which they rightly deserve. I 
do think, Ambassador, that we are creating a void when it comes 
to IMET, that those relationships are very, very important, and 
to the extent that we are losing--these are our friends--the 
ability to strengthen those relationships, then a void is 
created. It may be in a specific area and it certainly does not 
void, using that term, all other relationships. But I think 
something is lacking there.
    But what I am hearing is that we are not seeing anybody 
rushing into that at this point in time. But clearly, other 
countries, and China in particular, are looking to strengthen 
those relationships. Relationships are important.
    Ambassador Shapiro. They are important and they are the 
relationships that are made by young officers as they go 
through their career that are important. We want to have them, 
so that we know them, they know us, they know our culture, our 
military culture, and so that we can work with them.
    That is why we are working so hard to conclude these ASPA 
agreements.
    Senator Coleman. I mentioned it particularly in regard to 
China because it gets back to my earlier question, that we have 
a culture, a military culture, still built on foundations of 
democracy and foundations of rule of law, and that is not the 
Chinese experience, democracy. So we are losing the ability to 
train young military officers with a fundamental respect and 
appreciation for what democracy has to offer, and if that is 
then being filled in any way by countries that do not have that 
same tradition, we should be concerned. We are not talking 
about economics now. We are not talking about GDP. We are 
talking about fundamental respect for human rights. We are 
talking about fundamental respect for democracy, rule of law, 
and the impact that has on the military. You want officers who 
understand that. If somehow what we are offering is being 
replaced, it raises concern.
    Mr. Pardo-Maurer.
    Mr. Pardo-Maurer. Yes. I would just like to throw a 
poignant example into the discussion here. I was just in Peru 
with Secretary Rumsfeld, where we visited with President 
Toledo. President Toledo was from a very humble family, an 
indigenous family from the highlights of Peru, I believe one of 
16 children, 7 of whom died in infancy. Someone, somewhere, saw 
this young man back in the sixties and said: He can play 
soccer. And he went on a soccer scholarship to the University 
of San Francisco and from then went on to get a Ph.D. in 
economics from Stanford on scholarships and eventually became 
President of his country.
    I can tell you, we have a good friend in President Toledo. 
President Uribe of Colombia has said few if anyone have been as 
supportive of his efforts as President Toledo. So that is the 
kind of difference that a single scholarship can make.
    Senator Coleman. I share that perspective. President Toledo 
said he is President by accident and where he grew up people 
did not get that, an education. He did and is President of his 
country. I am tempted to have my kids learn to play soccer 
better if that is the path.
    Let me ask one other foreign relations question and then I 
want to just turn to economic matters. President Lula has 
spoken of developing a strategic partnership with China. Can 
anyone give me their sense of what does that mean? Has Brazil 
achieved this? What are the implications for the United States 
regarding that relationship? Mr. Forden. Ambassador.
    Ambassador Shapiro. Well, when President Hu went to China 
they signed a number of agreements that promise great 
investment. It will be interesting to see how many of those are 
actually realized, how much money actually is invested.
    Senator Coleman. When you said ``President,'' you mean when 
President Hu went to----
    Ambassador Shapiro. Brazil.
    Senator Coleman. Brazil. You said to China.
    Ambassador Shapiro. I am sorry. I apologize. I got it 
backward there.
    Both are regional powers, both Brazil and China. It is 
normal that they would trade with each other and that they 
should seek to improve their relations with each other. We do 
not see that as a threat to the United States. We see it as a 
normal part of both of those countries as their economies are 
growing and as they have more power, economic power and 
political power beyond their borders, to deal with each other.
    Let me go back to the point we have been making throughout, 
and that is that rules are important. What we want to see are 
rules of the game. We think it is important for China to have 
an interest in the rules. Because it has investments in Latin 
America, it will have an interest in stability in Latin 
America. We want to ensure that Chinese investors and Chinese 
exporters compete on a level playing field with United States 
investors and United States exporters.
    Senator Coleman. Mr. Pardo-Maurer.
    Mr. Pardo-Maurer. We, at the Defense Department, have a 
very particular interest in what is happening in terms of the 
scientific and technical cooperation between Brazil and China. 
We, at the Defense Department, take the science capabilities of 
the Southern Cone countries very, very seriously. By many 
measures--and this is, if I may put in an advertisement, this 
is a good subject for further inquiry by the Western Hemisphere 
Subcommittee.
    By many measures, the Southern Cone is one of the fastest 
growing regions of the world for quality scientific research 
and articles. That is according to the National Science 
Foundation. I can get this report to you.
    We recognize this. In 2002 we established an Office of 
Naval Research office in Santiago. We established a counterpart 
from the Army in Buenos Aeres and we have made a lot of 
progress toward establishing an Africa office for Brazil.
    They are doing tremendous research and we are benefiting 
from that. Dr. Sega, a former astronaut colleague of Senator 
Nelson who is the Director of Defense Research Engineering, 
came to Brazil with Secretary Rumsfeld to further our 
cooperation in this area. When we see Brazil developing very, 
very fruitful relationships in aerospace, in satellite 
technology, even launching satellites with China, what we see 
is a country that we want to be working with, too. Everything 
we can do to strengthen that scientific relationship is 
important.
    What is important is that countries like China and Brazil 
and everyone else see that this can be mutually beneficial. 
This is not a zero sum world at all when it comes to that kind 
of research. We can cooperate, and our aim in establishing 
these offices in the Southern Cone is to promote just that kind 
of interchange and cooperation.
    Senator Coleman. Though we talk about interchange and 
cooperation, we have sent a very strong message to the 
Europeans, a very strong message of concern about selling 
military technology, scientific capability that can be 
converted to military use, to the Chinese. Have we communicated 
that same message to Brazil or countries in the Southern Cone 
that have access to technology that would be of concern were it 
to be sold to the Chinese?
    Ambassador Shapiro. It is not a policy vis-a-vis Europe. It 
is a global policy of the United States, our concerns 
concerning certain exports to China.
    Senator Coleman. So I take it then the answer is----
    Ambassador Shapiro. Yes.
    Senator Coleman [continuing]. That it is as applicable to 
the Southern Cone----
    Ambassador Shapiro. It is a consistently applied policy, 
yes.
    Senator Coleman. Let me just ask if I can, two other 
questions. First, regarding human trafficking. Ambassador, any 
concerns the State Department may have regarding Chinese human 
traffickers operating in Latin America and the Caribbean? How 
are we working to address this?
    Ambassador Shapiro. Yes, it is a concern. We estimate that 
between 20 and 30,000 Chinese migrants enter the United States 
illegally each year. Now, they are not just going through Latin 
America. They are going through Asia, Europe, Canada, and Latin 
America to get to the United States.
    We are working with the Chinese, we are working with the 
governments of Latin America, to try to stop that, interdict 
that traffic. We have stopped several ships recently in the 
Pacific. It is not just a Chinese phenomenon. Other Latin 
Americas are coming by ship up the west coast of Latin America 
to the United States. So we are working to stop that. The Coast 
Guard is working very hard on it and we are working with 
governments on that.
    Our Trafficking in Persons Office at State Department has 
paid particular interest to the whole trade in people, which is 
a very lucrative and illicit trade.
    Senator Coleman. How would you then describe the level of 
Chinese cooperation as we are working with them to stop this?
    Ambassador Shapiro. I have to turn to my China expert.
    Mr. Forden. Well, as Ambassador Shapiro mentioned, Mr. 
Chairman, this is an issue that has drawn a lot of attention 
from our Office of the Ambassador for Trafficking in Persons. 
Geared toward our annual review of the trafficking in persons 
problem around the world, our annual report, we have an ongoing 
dialog with China. We share our concerns with them. The 
Government of China has been cooperative, has officially agreed 
and cooperated with us that this is a problem that they would 
like to work with us to attack and to try and stop.
    We have worked together with--our law enforcement people 
have worked with their law enforcement people on individual 
cases. But given the enormity of China's population and the 
push pressures from population pressures there and the pull of 
opportunities in the United States and other places outside of 
China, it is a problem that is not likely to go away very 
quickly, but one that we are working with China to resolve.
    Senator Coleman. Thank you, Mr. Forden.
    Mr. Pardo-Maurer, does the Pentagon have any concerns 
relative to China and the Panama Canal?
    Mr. Pardo-Maurer. There is a common concern out there that 
somehow, because a company--this emerged a few years back 
because a company controlled by Chinese investors had gained 
control of the terminal facilities of the canal, that somehow 
this was going to be a threat, and it is not, that we can tell.
    The redevelopment of the Panama Canal is going to be one of 
the biggest infrastructure projects in history. It is probably 
a $16, $20, $25 billion project. Panama has reached the final 
stages of the decision to go ahead with this, and they are 
going to be looking for investors. They are going to be looking 
for governments and companies and individuals who are going to 
be stakeholders in this project. It is something that we have 
looked at.
    I think it is very much in the interest of the United 
States to ensure that this project goes ahead in ways that 
strengthen the countries that use it responsibly and that are 
members of the responsible global trading community. Now, China 
is one of the largest users of the canal and fast-growing. I 
think it is the third largest user. So from what we can tell, 
it is in their interest to have a canal that works and is 
dependable and is reliable.
    So to me the canal is actually a classic example of how 
bringing China in or helping China become a responsible trading 
partner, a responsible member of the world trading community, 
is in our interest. It makes the Panama Canal, which is truly--
it is Panama's of course, but it is a global asset. It makes 
the canal something that they have an interest in cherishing 
and defending.
    So there are two aspects to this. One is who controls the 
canal from here to the future, and that is Panama's 
prerogative. The canal belongs to Panama. The other is securing 
international cooperation so that the canal is safe.
    We do know that al-Qaeda has sent people to scope out the 
canal and that it was on their list of targets. So to the 
degree that China can be a partner in protecting that asset, 
whether because of what it knows in its part of the world or 
other ways, that is an important thing.
    I am not sure I answered your question by saying that, but 
the short answer is that the most common concerns that I have 
seen out there, that because a certain company that has Chinese 
investors, controls the terminal facilities of the canal, that, 
therefore, we need to be concerned, that I think is not a 
concern.
    Senator Coleman. You have answered the question. The 
question stemmed from those kind of conversations and concerns 
that have been raised.
    But I do appreciate, to the entire panel, your going beyond 
that, because, as I said after listening to the testimony 
before the questioning, I felt this was rather optimistic, 
which is nice. I am an optimist. This was a rather optimistic 
perspective on what is happening with China and Latin America--
that, in fact, we in the United States have a history, have 
relationships, have strong economic ties with the hemisphere 
that far exceed other ties. Even though China certainly is 
looking to expand its place--the need for resources, 
opportunity for markets--the sense I am getting is that that 
does not have to be a threat, that we can work with China, and 
in the end if we can add to the economic opportunity, add to 
the economic security, and continue to work with China and this 
community of democratic nations, this is not a bad thing.
    So this has been very, very helpful. I want to thank you 
gentlemen for your testimony, and this panel is excused.
    Our second panel is composed of: Mr. Stephen Johnson, 
senior policy analyst for Latin America, the Catherine and 
Shelby Cohen Davis Institute for International Studies at the 
Heritage Foundation. Mr. Johnson is a former State Department 
officer who worked at the Bureaus of Inter-American Affairs and 
Public Affairs as a writer and researcher, as director of the 
Central America Working Group, and as chief of the editorial 
division in the Bureau of Public Affairs.
    A former Air Force officer, he served as Assistant Air 
Force Attache in Honduras. Later as a member of the Air Force 
Reserve, he was a Public Affairs Officer and Strategic Planner 
in the Office of Public Affairs for the Secretary of the Air 
Force, and was also a Public Affairs Officer for the United 
States Southern Command.
    Dr. David Lampton is dean of faculty, George and Sadie 
Hyman Professor, and director of China Studies of the Johns 
Hopkins School of Advanced International Studies, as well as 
founder and director of China Studies at the Nixon Center. 
Before assuming these posts, he was president of the National 
Committee on United States-China Relations in New York City 
from 1988 through 1997.
    Prior to 1988, Dr. Lampton was founder and director of the 
China Policy Program at the American Enterprise Institute and 
associate professor of political science at the Ohio State 
University. Dr. Lampton is the author of numerous books and 
articles on Chinese domestic and foreign affairs.
    Dr. Gal Luft is codirector of the Institute for the 
Analysis of Global Security. He has published numerous studies 
and articles on security and energy issues in various 
newspapers and publications, appears frequently in the media, 
and consults to various think tanks and news organizations 
around the world.
    We will begin with Mr. Johnson, then go to Dr. Lampton, and 
end with Dr. Luft. With that, gentlemen, thank you for being 
here today and I look forward to your testimony.

STATEMENT OF STEPHEN JOHNSON, PH.D., SENIOR POLICY ANALYST FOR 
     LATIN AMERICA, THE HERITAGE FOUNDATION, WASHINGTON, DC

    Mr. Johnson. Thank you, Chairman Coleman.
    Members of the committee, it is an honor and a privilege to 
appear before you today to discuss the influence of the 
People's Republic of China in Latin America. I would commend 
you, as the previous panel did, for holding a hearing as China 
carves a role for itself in this hemisphere and undoubtedly 
will become a factor in affecting relations between the United 
States and its neighbors.
    The United States has become the greatest power in the 
world based on its tradition of free choice. Choice goes hand 
in hand with competition to keep markets vibrant and government 
accountable. Human talent from all over the world has come here 
to prosper by these values.
    Starting in the 1960s, there was ideological competition 
from abroad. The Soviet Union was able to intrude, supporting a 
dictatorship first in Cuba and later insurgencies in Central 
America. In the end, liberal reforms won out. Encouraged by the 
United States, reforms have generally helped Latin America 
states become more politically, economically, and commercially 
viable.
    Once again, emissaries are coming from the other side of 
the world, this time to compete in commerce, diplomacy, and 
military-to-military relations. We are not sure that we like 
it. The People's Republic of China is a Communist State that is 
embracing market-based commercial concepts, but it is still a 
nonmarket economy where a disciplined totalitarian party 
through the central government retains full authority over 
nonstate investment and trade.
    Latin America is rich in natural resources and developing 
markets, which China needs. There is no question it has its 
foot in the door and seeks access to advance its own interests, 
as any nation would.
    We can shrink from this intrusion or we can attempt to 
contain it. But maybe it is best to look after our hemispheric 
interests and mitigate China's presence by relying on an old 
friend: Competition. Specifically, we can do this by 
consolidating trade relationships with Latin America and 
dropping our own protectionist barriers, developing 
comprehensive relations as opposed to narrow interest 
diplomacy, such as counternarcotics, minimizing unproductive 
restrictions on assistance to our neighbors, and by pressing 
harder for democratic and economic reforms, prioritizing 
support for these purposes, and reenergizing our public 
diplomacy.
    China is not only a nation, but also the world's oldest 
continuous civilization, with more than 3,500 years of written 
history. Relatively recently, it suffered hard times. Communism 
did little to help. But in 1978 Communist Party leader Deng 
Xioa-Peng introduced economic reforms that have steadily 
transformed the PRC into a socialist market economy. Twenty-
five years into this experiment, we witness that China has one 
of the world's largest economies, the third biggest defense 
budget, the highest population of any nation at 1.3 billion 
persons. According to the World Bank, its gross domestic 
product of $1.6 trillion is growing about 9 percent per year, 
and at $230 billion in trade it is our second biggest partner 
in commerce, something that we should think about as we look at 
how we might want to contain its relations in Latin America.
    Resources must feed that economy and China does not have 
sufficient oil, natural gas, aluminum, copper, iron to satisfy 
those needs. Furthermore, China needs trade partners to buy its 
electronics, apparel, toys, and footwear. Asian neighbors are 
competing for many of the same markets, as are Europe and the 
United States.
    For China, Latin America has promising characteristics. It 
is relatively unindustrialized and has lots of raw materials. 
Moreover, signing purchase agreements with the, perhaps, 
corrupt officials who lead some of the governments--and I say 
some of the governments, not all of them--is much easier than 
dealing with a panoply of private corporations because it makes 
possible one-stop shopping.
    China's main rival for global preeminence is the United 
States. It sees the United States preventing Taiwan's 
reunification with the mainland and thwarting Beijing's rise as 
a power. While it has become our second largest trade partner 
after Canada, China challenges our influence where it can. It 
may soon possess more attack submarines than we do.
    Science, sports, and military exchanges characterized Sino-
Latin American relations in the 1980s. Economic ties did not 
develop significantly until after 1990, President Yang Shangkun 
visited Latin America with an upbeat message: ``A new 
international political and economic order,'' he called it. 
Soon after that, the pace picked up. In April 2001 Chinese 
President Jiang Zemin made a 12-day visit to cement trade ties 
and attack Washington's unipolar scheme. Last November, 
President Hu Jintao flew to Argentina, Brazil, Chile, and Cuba, 
where he signed 39 bilateral agreements and announced $100 
billion in investments over the next 10 years.
    Because China's demand for oil has been growing to satisfy 
industrial needs and demands for consumers, it has pursued 
agreements with such producers as Venezuela, Ecuador, Colombia, 
Argentina, Brazil, and even Mexico. Obviously, the best fit is 
Venezuela, whose authoritarian leader Hugo Chavez directly 
controls the state oil industry. President Chavez even invited 
the Chinese National Petroleum Corporation to help explore the 
rich Orinoco Belt and last year President Chavez advanced an 
agreement with Colombia to build a pipeline to the Pacific Port 
of Tribuga to enable China to access Venezuelan oil from the 
Pacific coast.
    China also has a bid on concessions to Ecuador's major oil 
fields and also has interests in an Argentine firm that has 
concessions on fields in northern Argentina as well as Peru.
    On the military front, China has expanded ties through 
exchanges. It reportedly has direct military-to-military 
relations with Venezuela, as well as Argentina, Chile, Peru, 
and Uruguay. The PRC began collaborating with Brazil on spy 
satellite technology in 1999, providing needed rocket launch 
expertise in exchange for digital optical technology. Access to 
Brazil's space tracking facilities could give it the ability to 
attack United States satellites.
    But perhaps the most fruitful collaboration of all has been 
with dictator Fidel Castro in Cuba. In 1999 China was 
reportedly intercepting satellite signals from facilities in 
eastern Cuba. In 2000 it obtained access to a base outside of 
Havana to intercept U.S. telephony along the east coast. In 
2001, Russia announced it would abandon its extensive 
electronic espionage center at Lourdes and the PRC now 
reportedly occupies it.
    At first blush, expanding ties between Latin America and 
China may seem like a good fit. China makes deals on the spot 
without a lot of strings. Its transactions are based on simple 
exchanges, and China's markets are indeed expanding. However, 
such dealings pose problems. It shames American-style 
bottleneck diplomacy. Latins find that obtaining any kind of 
assistance from us requires compliance on a battery of 
restrictions from protecting the environment to signing 
promises not to send U.S. military personnel to the 
International Criminal Court. Some say, why bother?
    Latin American leaders have noticed that China's exports 
are much cheaper than their own, and our own as well--leading 
to big trade deficits. Chinese goods are made by laborers who 
toil for about a third of the wages of Latin American 
counterparts and tolerate worse working conditions. For every 
dollar's worth of goods Mexico sells to China, we are told, the 
PRC reportedly makes $31 from exports to Mexico.
    Now, some analysts believe that China is encouraging a 
commodities-based trade model that will supplant the progress 
that the region has made toward industrialization. While 
countries like Chile and Brazil have gotten beyond raw 
materials exports, powerful Presidents and comfortable 
oligarchies may be tempted to fall back on plantation 
economics. Income gaps between the rich and the poor may widen. 
Greater inequality and political instability could depress U.S. 
exports to the region and worsen migration problems.
    In conclusion, the United States and China have competing 
interests in Latin America. The best way to address them is to 
rely on America's strength, which is competition. U.S. 
policymakers should make true competition paramount, and in 
doing so they should accelerate free trade agreements by 
dropping agricultural and steel subsidies that dissuade 
potential partners and cost taxpayers money. United States 
trade relations with Andean neighbors and eventually the 
Southern Cone countries can open market access for both United 
States and Latin America enterprises and provide a solid outlet 
for nonstate industrial growth.
    We should adopt more comprehensive relationships as opposed 
to single-issue diplomacy, such as counternarcotics, as we had 
initially with Colombia. Plan Colombia is working because the 
United States is helping its South American partner expand 
public safety zones, reactivate the economy, and strengthen 
public institutions.
    Cut strings on assistance to the greatest extent possible. 
Certifications and restrictions are blunt instruments that do 
not necessarily cover every situation and even harm some U.S. 
security interests.
    Press harder for reforms. U.S. support for democracy and 
economic reforms has actually declined over the past 15 years. 
United States public diplomacy, which is reactive toward Latin 
America, needs strengthening and needs to be more supportive of 
our development agenda.
    Mr. Chairman, thank you for this opportunity to address the 
committee. I could easily go on. But this is a big subject. 
Thank you very much.
    [The prepared statement of Mr. Johnson follows:]

  Prepared Statement of Stephen C. Johnson, Senior Policy Analyst for 
   Latin America, the Kathryn and Shelby Cullom Davis Institute for 
     International Studies, the Heritage Foundation, Washington, DC

    Chairman Coleman, members of the committee, it is an honor and a 
privilege to appear before you today to discuss the influence of the 
People's Republic of China in Latin America.
    I commend you for holding a hearing on this topic as China carves a 
role for itself in this hemisphere and undoubtedly will become a factor 
affecting relations between the United States and its neighbors in the 
Americas.
    I testify today as an individual and do not necessarily reflect the 
views of my employer, the Heritage Foundation.

                     STRANGERS IN THE NEIGHBORHOOD

    The United States has become the greatest power in the world based 
on its tradition of free choice. Choice goes hand in hand with 
competition to keep markets vibrant and government accountable. Human 
talent from all over the world has come here to prosper by these 
values. Ironically, most of our neighbors in Latin America are just 
awakening to the benefits of competition, abandoning imposed rule for 
electoral choice and open markets.
    The region is awakening to another kind of competition as well. 
When distances were great and communications poor, the United States 
was the dominant actor and could warn extra-hemispheric powers against 
meddling in the neighborhood. By the 1960s, the Soviet Union was able 
to intrude, supporting Fidel Castro's dictatorship in Cuba and, later, 
insurgencies in Central America.
    Although some countries, like Colombia, have always been democratic 
and trade oriented, Soviet intervention triggered competition between 
right-wing authoritarianism, democracy, and Marxism. In the end, 
liberal reforms won out. Encouraged in by the United States, they have 
generally made Latin American states more independent politically, 
economically, and commercially.
    Now, emissaries from the other side of the world are coming to our 
hemisphere to compete in commerce, diplomacy, and military relations. 
And we are not sure we like it. The People's Republic of China (PRC) is 
a Communist State that is embracing market concepts. But it is still a 
nonmarket economy where a disciplined totalitarian party, through the 
central government, retains full authority over nonstate investment, 
import, export, and financial decisions.
    Latin America is rich in natural resources and developing markets--
which China needs. There is no question it has its foot in the door and 
seeks access to advance its own interests. We can shrink from this 
intrusion or attempt to contain it--with disastrous consequences in 
each case. Perhaps the United States can best look after its 
hemispheric interests and mitigate China's presence by relying once 
more on its competitive tradition. Specifically by:

   Consolidating trade relations with Latin America and 
        dropping our own protectionist trade barriers;
   Developing comprehensive relationships as opposed to narrow-
        interest diplomacy such as counternarcotics;
   Minimizing unproductive restrictions on assistance to our 
        neighbors; and by,
   Pressing harder for democratic and economic reforms, 
        prioritizing support for these purposes and re-energizing 
        public diplomacy.

                     CHINA'S AGENDA IN THE AMERICAS

    China is the world's oldest continuous civilization with more than 
3,500 years of written history. In the mid-1800s, the ruling Qing 
Dynasty began to crumble, inciting a period of decline and foreign 
intervention. At the end of World War II, China's Nationalist 
government had been weakened by a decade of war against Japan, and was 
wracked by corruption and incompetence. Then the Nationalists embarked 
on a civil war against Chinese Communist Party bases and were defeated.
    By 1950, Communist leaders like Mao Zedong believed their 
authoritarianism would return China to glory, a belief that expired 
after 30 million starved to death in state-induced famines in the early 
1960s, and another 10 million perished in fanatical ideological 
campaigns. In December 1978, after several ``great leaps'' backward, 
the Communist Party leader Deng Xiaoping introduced economic reforms 
that have steadily transformed the PRC into a remarkable hybrid--a 
``socialist market economy''--in essence a Communist State that uses 
market-based pricing principles.
    Feed the Dragon. Twenty-five years into this experiment, China has 
the world's second largest economy, the third biggest defense budget 
according to some analysts, and the highest national population of any 
nation at 1.3 billion persons. According to the World Bank, its gross 
domestic product of $1.6 trillion is growing about 9 percent per year. 
Resources must feed that economy and China does not have sufficient 
oil, natural gas, aluminum, copper, iron, to satisfy energy or 
manufacturing needs. Furthermore, it needs trade partners to buy its 
electronics, apparel, toys, and footwear.
    Asian neighbors are competing for many of the same markets, as are 
Europe and the United States. But Latin America has promising 
characteristics. It is relatively unindustrialized and has lots of raw 
materials. Moreover, authoritarian leaders and/or corrupt oligarchies 
control a number of governments. Signing purchase agreements with them 
is much easier than dealing with a panoply of private corporations and 
enables one-stop shopping.
    Challenge the United States. China's main rival for global 
preeminence is the United States. It sees the United States preventing 
Taiwan's reunification with the mainland and thwarting Beijing's rise 
as a power. Once isolated, it now plays key roles in Asian geopolitics 
and aspires to do so elsewhere. Besides status as a nuclear nation, it 
is a member of the United Nations Security Council, the World Trade 
Organization, the Group of 77 developing nations, Asia Pacific Economic 
Cooperation group, and holds observer status in the Organization of 
American States.
    And while it has become our second largest trade partner after 
Canada, it challenges our influence wherever it can. In fact, it may 
soon have more attack submarines than the United States, with the 
addition of four Russian Kilo-class subs and new diesel-electric 
vessels equipped with technology that will allow them to run more 
silently than some nuclear technology.
    According to former U.S. Ambassador to Beijing James Lilly, ``. . . 
the facts are that they run massive intelligence operations against us, 
they make open statements against us, their high-level documents, show 
that they are not friendly to us.'' Its military white papers promote 
power projection and describe the U.S. policies as ``hegemonism and 
power politics.'' \1\
---------------------------------------------------------------------------
    \1\ Jane Bussey and Glenn Garvin, ``China Exerting Regional 
Influence, Analysts Warn of Political, Strategic Challenges to U.S. in 
Latin America,'' the Miami Herald, April 15, 2001, p. 1-A.
---------------------------------------------------------------------------
    Isolate Taiwan. Separate since the 1949 civil war, free, prosperous 
Taiwan has been the ``renegade province'' that must be reunified with 
the PRC. Part of Beijing's plan to bring it back into the fold has been 
to isolate it diplomatically. In the 1950s, most of Latin America had 
relations with Taiwan. Then, the Cuba's Fidel Castro regime established 
ties with China in 1960. Then Chile led a major shift in favor of the 
PRC in 1970. Globally, just 25 countries accord Taiwan status--a 
quarter of them in Latin America: Costa Rica, El Salvador, Guatemala, 
Honduras, Nicaragua, Panama, and Paraguay. Taiwan pays dearly, 
providing development aid and disaster assistance to these states.

                          WESTERN WELCOME MAT

    Science, sports, and military exchanges characterized relations in 
the 1980s. Economic relations did not develop significantly until after 
1990. A year after China repressed dissidents in Tiananmen Square, 
President Yang Shangkun visited Latin America. His trip heralded the 
beginning of an increasing number of high-level missions to lay the 
foundation for ``a new international political and economic order,'' as 
he described it.\2\
---------------------------------------------------------------------------
    \2\ Beijing Liaowang Number 15, Xinhua News Agency, April 9, 2001, 
pp 3-4, cited in ``Chinese Infrastructure Projects in Latin America,'' 
Intellibridge, July 19, 2004, p. 2.
---------------------------------------------------------------------------
    The pace picked up at the turn of the new century. In April 2001, 
Chinese President Jiang Zemin presided over a 12-day mission to cement 
economic and trade ties, as well as attack what he called Washington's 
``unipolar'' scheme.\3\ His itinerary included Argentina, Uruguay, 
Brazil, Cuba, and Venezuela. In November, Li Peng, the chairman of the 
Standing Committee of the People's National Congress followed up. Last 
November, President Hu Jintao flew to Argentina, Brazil, Chile, and 
Cuba where he signed 39 bilateral agreements and announced $100 billion 
in investments over the next 10 years. This May, Communist Party 
chairman, Jia Qinglin, visited Colombia, Mexico, Uruguay, and Cuba.
---------------------------------------------------------------------------
    \3\ Jane Bussey and Glenn Garvin, op. cit.
---------------------------------------------------------------------------
    Building on simple commercial agreements, China has advanced to 
economic assistance, direct investment, a few joint ventures, and 
military ties. When Argentina's financial collapse rippled through 
South America's Southern Cone, China quickly seized the chance to 
increase its stake in Argentina and Brazil, even though U.S. investment 
declined by nearly half. Joint ventures include partnerships with Great 
Dragon Telecom in Cuba and in Casanare Department in Colombia. China is 
partnering with Brazil to improve its railways and establish a link to 
the Pacific to cut transportation costs on iron ore and soybeans. 
Chile's congested port at Antofagasta may get a facelift thanks to the 
PRC.
    Because China's demand for oil has been growing to satisfy 
industrial needs and demands of consumers, it has pursued investments 
and agreements with such oil producers as Venezuela, Ecuador, Colombia, 
Argentina, Brazil, and even Mexico. The best fit is with Venezuela 
whose authoritarian leader Hugo Chavez directly controls the state oil 
industry. President Chavez has invited the Chinese National Petroleum 
Corporation (CNPC) to participate in exploring in the rich Orinoco 
belt. Meanwhile, the CNPC has invested $300 million in technology to 
use Venezuela's Orimulsion fuel in Chinese powerplants.
    For now, Venezuela plans to increase exports to China by 300,000 
barrels per day and recently signed an agreement with Colombia to build 
a pipeline to the Pacific coast of Port of Tribuga, since supertankers 
cannot transit the Panama Canal. A proposal with Panama would modify a 
pipeline there to facilitate Pacific shipping. On a visit to Beijing 
last year, President Chavez said shifting exports to China will help 
end dependency on sales to the United States.
    In 2003, China bid on concessions to Ecuador's major oil fields. 
The same year, the CNPC acquired a stake in the Argentine oil and gas 
firm Pluspetrol that operates fields in northern Argentina and Peru. 
While Mexico's Constitution prohibits foreign investment in Pemex, a 
boost in petroleum exports is expected to address Mexico's trade gap 
with the PRC. And, although it has no current profile in Bolivia, 
China's market and presence could be ideologically acceptable to a 
future populist President, like Evo Morales, in lieu of Western private 
investment.
    On the military front, China has expanded ties through exchanges. 
It reportedly has direct military-to-military relations with Venezuela, 
as well as Argentina, Chile, Peru, and Uruguay. The PRC began 
collaborating with Brazil on spy satellite technology in 1999, 
providing needed rocket-launch expertise in exchange for digital 
optical technology that will permit high resolution, real-time imaging. 
Moreover, access to Brazil's space tracking facilities could give China 
the ability to attack U.S. satellites with a variety of technologies 
under development.
    Perhaps the most fruitful collaboration has been with dictator 
Fidel Castro in Cuba. In 1999, China was reportedly intercepting 
satellite signals from facilities in eastern Cuba. In 2000, it obtained 
access to a base outside of Havana to intercept U.S. telephony. In 
2001, Russia announced it would abandon its extensive electronic 
espionage center at Lourdes. PRC personnel now reportedly occupy it. A 
February 2004 agreement cloaks such operations under the pretext of 
technical communications cooperation. In fact, Radio China 
International signals originate from Cuba. But so, too, does 
interference with U.S. east coast radio communications and air traffic 
control according to Federal Communications Commission complaints.\4\
---------------------------------------------------------------------------
    \4\ Cited by Albert Santoli, ``China's Strategic Reach into Latin 
America,'' testimony before the U.S.-China Economic and Security Review 
Commission, 124 Dirksen Senate Office Building, Washington, DC, July 
21, 2005 at www.uscc.gov/hearings/2005hearings/written_testimonies/
05_07_21_22wrts/santoli_albert_wrts.htm (September 18, 2005).
---------------------------------------------------------------------------
                            WILLING PARTNERS

    At first blush, expanding relations with China may seem a good fit. 
Dealing with China, a major world power, elevates a small country into 
the big leagues of global actors. It provides respect for those living 
in the shadow of the prosperous U.S. colossus. The novelty of frequent 
high-level visits suggests that American leaders--who visit less 
often--have ignored the region.
    Few Requirements. China makes deals on the spot without a lot of 
strings--its transactions are based on simple exchanges. Their leaders 
have broad authority to negotiate foreign deals with worrying about 
legislative oversight, rule of law, or altruistic objectives. And, 
there is no need build up Latin American trade capacity to deal with 
diverse businesses, because these Chinese leaders represent state 
monopolies--which meshes well with Latin American government ownership 
or management of telecommunications, mining, and energy industries.
    Leverage Against Uncle Sam. China's markets are expanding--a 
temporary boon to resource-rich Latin America. Imports from the region 
have grown more than 600 percent in 5 years.\5\ Compared with United 
States-Latin America trade figures for 2004 at $410 billion, China's 
$40 billion trade with the region might seem inconsequential. But 
Chinese trade and investment gives Latin politicians and business 
elites, who largely control commodities, a bargaining chip to boost 
prices when dealing with the United States.
---------------------------------------------------------------------------
    \5\ See U.S. International Trade Administration at www.ita.doc.gov/
td/industty/otea/usfth/tabcon.html (September 18, 2005); and Kerry 
Dumbaugh and Mark P. Sullivan, ``China's Growing Interest in Latin 
America,'' Congressional Research Service, April 20, 2005, p. 2.
---------------------------------------------------------------------------

                        CONCERNS FOR WASHINGTON

    Even so, China's growing influence poses problems for both the 
United States and Latin America.
    Bad for Bottleneck Diplomacy. China's flexibility cuts into U.S. 
leverage. Obtaining any kind of assistance from the United States 
requires compliance on a battery of restrictions from observing human 
rights, protecting the environment, signing agreements not to send U.S. 
military personnel to the International Criminal Court, not assisting 
current or former terrorists, or violating orders not to use U.S.-
provided equipment for any other than its stated purpose. American 
commitments also depend on legislative approval and can be reversed, 
depending on the mood of the U.S. Congress.
    Competition for Resources. China offers direct investment in 
infrastructure development to obtain commodities. The United States, on 
the other hand, has no direct-tie state industries and can only offer 
development aid, now in decreasing amounts. Millennium Challenge 
Account (MCA) money may be less of an incentive to democratize 
governments and liberalize markets with Chinese competition. There is a
1- to 2-year lead time from the time an MCA award is proposed to when 
it is dispersed, during which some volatile governments can back away 
from market-oriented performance requirements.
    Growing Trade Deficits. Latin America leaders who sign trade and 
investment deals with the PRC have noticed that China's exports are 
more affordable than their own--contributing to trade deficits. After 
all, Chinese goods are made by laborers who work for a third of the 
wages of Latin American counterparts and who tolerate worse working 
conditions. Officials in Argentina, Brazil, and Mexico have signaled 
their unease about trade with such a hot competitor. This month, 
Mexican President Vicente Fox made it clear to visiting President Hu 
Jintao that dumping electronics and clothing was unacceptable. For 
every dollar's worth of goods Mexico sells to China, the PRC makes $31 
from exports to Mexico.\6\
---------------------------------------------------------------------------
    \6\ James C. McKinley, Jr., ``Mexico Builds Trade Ties with 
China,'' The New York Times, September 13, 2005, p. 3.
---------------------------------------------------------------------------
    Disinterest in Economic Reform. Some analysts believe that China is 
encouraging a commodities-based trade model that will supplant the 
progress Latin America has made toward industrialization. While 
countries like Chile and Brazil have gotten beyond raw materials 
exports, powerful Presidents or ruling oligarchies may be tempted to 
fall back on plantation economics. Income gaps between the rich and 
poor may widen. Moreover, those economies might not be sufficiently 
diversified to withstand downturns in commodity prices. Some 44 percent 
of Latin Americans already live below the poverty line. If these 
countries fail to adopt reforms, social inequality, and political 
instability could depress U.S. exports to the region, and worsen 
migration problems.
    Eye on America. From electronic espionage facilities in Cuba to 
port facilities run by Hong Kong billionaire Li Ka-Shing's Hutchison-
Whampoa conglomerate in Panama, China has an eye trained on the United 
States. U.S. intelligence agencies are aware of this, it is possible 
that Washington's penchant for focusing on one threat at a time could 
leave America vulnerable.

                            RECOMMENDATIONS

    The United States and China have competing interests in Latin 
America. Washington would like to see its hemispheric neighbors develop 
into stable, democratic, prosperous trade partners that embrace the 
rule of law. Beijing sees the region as a source of raw materials, a 
market for manufactured goods, as well as platform for power 
projection. U.S. interests probably coincide more with Latin American 
needs. In contrast, China represents an opportunity to temper American 
dominance with broader alliances.
    Unfortunately, Chinese aid and commodity imports may buy time for 
state industries, powerful Presidents, and influential oligarchs. Most 
of all, such commerce could delay needed reforms and industrialization 
that might lift half of the Latin America's people out of poverty. 
America's strength is competition. It should influence the rules of the 
game in that direction. As a good neighbor and acting in both its own, 
Latin America's interests, and even China's, the United States should:

   Accelerate free trade agreements--the hallmark of U.S. 
        policies toward the region since the 1990s. As inducement, 
        America should drop its agricultural and steel subsidies that 
        dissuade potential partners and cost taxpayers money. U.S. 
        trade relations with Andean neighbors and eventually Southern 
        Cone countries will open market access for both U.S. and Latin 
        American enterprises and provide an outlet for industrial 
        growth.
   Adopt more comprehensive relationships as opposed to single-
        issue diplomacy such as counternarcotics. Plan Colombia is 
        working because the United States is helping its South American 
        partner to combat terrorism, expand public safety zones, 
        strengthen institutions, reactivate the economy, and promote 
        rural peace.
   Cut strings on assistance to the greatest extent possible. 
        Certifications and restrictions are blunt instruments that do 
        not cover every situation. Occasionally they backfire by 
        withdrawing support for allies in areas of mutual interest--
        such as security. If the U.S. Congress considers them 
        necessary, they should be tailored to do minimal damage to key 
        interests.
   Press harder for reforms, use public diplomacy. Once Latin 
        America had elected leaders and fledgling markets in the 1990s, 
        U.S. support for democracy and economic reforms declined. 
        Although it is each country's responsibility to solve its own 
        problems, external pressure can encourage progress. U.S. public 
        diplomacy, which is mostly reactive toward Latin America, 
        should be strengthened and more supportive of U.S. development 
        goals.

                               CONCLUSION

    The Department of State tells us that total trade between China and 
the United States grew from $33 billion in 1992 to over $230 billion in 
2004. U.S. companies have entered agreements establishing equity joint 
ventures, contractual joint ventures, and wholly foreign-owned 
enterprises in China. Cumulative U.S. investment in China is valued at 
$48 billion.
    In a globalized world, the Monroe Doctrine has declining relevance. 
Democracies have relations with whom they wish and nation competitors 
like China cannot be blocked from visiting the hemisphere. However, the 
United States can be more proactive in consolidating relations with its 
neighbors and promoting a truly open, competitive marketplace.
    Thank you, Mr. Chairman, for this opportunity to address the 
committee.

    Senator Coleman. Thank you, Mr. Johnson. I do appreciate 
the very specific recommendations that you have set forth in 
both your written and your oral testimony.
    Dr. Lampton.

 STATEMENT OF DAVID M. LAMPTON, PH.D., DIRECTOR, CHINA STUDIES 
    PROGRAM, PAUL H. NITZE SCHOOL OF ADVANCED INTERNATIONAL 
       STUDIES, JOHNS HOPKINS UNIVERSITY, WASHINGTON, DC

    Dr. Lampton. Thank you, Mr. Chairman, for inviting me to be 
here today. I would ask that the full statement--I am going to 
be brief--be entered into the record.
    Senator Coleman. Without objection.
    Dr. Lampton. I first want to associate myself with the end 
remarks you made at the previous panel. I found myself entirely 
in agreement with that; it reflects my perspective.
    I have three overriding messages in this testimony. To 
start, I do not believe it is accurate to conceive of the PRC 
as an 8-foot giant striding across Latin America; most of the 
testimony we have heard has been very moderate and certainly 
consistent with that. Indeed, if China overpromises, such as 
the $100 billion that we have heard about, when its economy is 
humming today, it runs the risk of disappointing Latin America 
when Chinese growth slows, as it will.
    Moreover, China has substantial problems in projecting its 
power, certainly military power. There are conflicts of 
interest between China and Latin America that will reduce 
Beijing's ability to cooperate in the region. And Latin 
America's interests in the United States will remain enormous 
for the foreseeable future.
    We must restore balance to our views of China, a balance 
that does not exaggerate Chinese power while respecting it.
    Second, although Chinese activity in the region can 
complicate U.S. diplomatic life, for example with respect to 
Cuba and the Chavez regime that we have been talking about in 
Venezuela, overall Chinese economic activity in the region, 
carried out under relatively free trade conditions, will boost 
the economic wellbeing in Latin America, though some economic 
sectors in the region will be hurt.
    In fact, I talked with some Mexican scholars early last 
week, and they were very alarmed at what is happening to 
Mexican manufacturing employment. So there are going to be 
resource-extracting countries that do rather well. There are 
going to be labor-intensive industrial sectors that are going 
to be hurt quite a bit. But nonetheless, a healthier, more 
diversified Latin America is in the interest of the United 
States.
    Finally, though the focus of this hearing is Chinese 
activity in Latin America, Latin America is not the principal 
foreign policy priority of Beijing.
    I have been asked briefly to address the issue of China's 
global strategy and the role Latin America plays in that 
strategy. The PRC's national strategy can be described 
succinctly: China seeks sustained, rapid economic growth to 
provide the long-term foundation for comprehensive national 
power.
    China has less than the global per capita average of almost 
every single natural resource, including water, petroleum, 
other precious metals, not to mention arable land. Beijing, 
therefore, counts on its foreign policy to provide needed 
markets, natural resources, capital, and technological inputs, 
and to create an international environment so that China does 
not have to spend excessively on defense.
    Latin America fits into this strategy because of its 
resources and markets and is part of Beijing's economically 
driven foreign policy. Chinese actions are not principally to 
compete with the United States geopolitically.
    Secondarily, China is in Latin America--and I have been 
surprised, nobody has mentioned the following--to reduce the 
degree to which states in the region recognize Taiwan. 
Currently 12 of the 24 nations that recognize Taipei globally 
are in Latin America and the Caribbean. Indeed, I understand 
Taiwan's President is on his way down to Latin America. I am 
sure he has multiple objectives, but one I am sure is to stem 
the loss of Latin American countries that recognize the 
Republic of China.
    With respect to policy recommendations, I have three. To 
start, notwithstanding our many disagreements with the PRC in 
the trade, human rights, proliferation, Taiwan, and other 
areas, America has a symbiotic relationship with the PRC. We 
need each other. Beijing needs the jobs, the technology, the 
markets, and relatively secure external environment that the 
United States can provide. The United States needs cooperation 
on issues such as the global war on terror, as we have seen 
recently in North Korea, and a host of other national and 
transnational issues. Huge numbers of American families benefit 
from the low interest rates that Beijing helps make possible 
through its purchase of U.S. debt.
    As we think about China's interaction with Latin America, 
our policy should be devised against this larger background of 
common as well as competitive interests.
    Second, China's growing involvement in Latin America is not 
a crisis for United States foreign policy. To the degree that 
it is a subject of concern, the focus should be on positively 
increasing U.S. influence in the region rather than being 
overly sensitive. And I very much agree with Mr. Johnson: The 
whole area of public diplomacy, students, all of that, and just 
the obstacles that now exist to getting business people and 
students into the United States, that is where we really ought 
to focus and not worry so much about what Beijing is doing.
    Finally, if Washington takes a broad future-oriented 
perspective, we may be surprised at some of the common 
interests we share. That list of shared or broadly compatible 
interests, in my view, includes the following: One, if China 
invests in oil and energy resources in Latin America when 
others are not prepared to do so, the PRC is contributing to a 
larger global pool of available energy. Latin American oil 
brought to the surface by Chinese companies or firms or 
interests probably is going to end up in the United States, as 
we just heard in the previous panel, the same way that Asian 
oil brought to the surface by American companies and interests 
probably is going to end up in China and Japan.
    Second, the United States is China's most important market 
for exports and getting to the entire eastern half of the 
United States market depends considerably on the Panama Canal. 
As China builds resource and food relations with the big 
eastern seaboard nations of Brazil and Argentina, the canal and 
free passage through it assumes ever more importance to 
Beijing. The idea that the PRC would somehow choose to impair 
passage through the canal strikes me as very unrealistic. That 
was the conclusion I drew from the earlier discussion on the 
first panel.
    Finally, the 2005 annual report of the Pentagon on the 
military power of the People's Republic of China makes clear 
that China still possesses very limited long distance 
conventional power projection capacity. This is going to remain 
true for a very long time, though improvements are occurring. 
It was only in July 2002 that a Chinese naval vessel first 
circumnavigated the world. There is no Sino-American military 
competition in Latin America now and there will not be for the 
foreseeable future. In short, a zero sum view in this 
globalized world is no longer appropriate and Chinese-United 
States-Latin American interaction is a good example of that new 
reality.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Lampton follows:]

    Prepared Statement of David M. Lampton, Dean of Faculty, Hyman 
 Professor, and Director of China Studies Program, School of Advanced 
International Studies, Johns Hopkins University, and Director, Chinese 
           Studies Program, the Nixon Center, Washington, DC

    Mr. Chairman and subcommittee members, thank you for inviting me to 
share my views on the People's Republic of China's (PRC) growing 
activity in Latin America with you.
    I have three overriding messages in this testimony: To start, I do 
not believe it is accurate to conceive of the PRC as an 8-foot giant 
striding across Latin America compromising vital American interests. 
China has, and will continue to have, substantial problems projecting 
its power (certainly military power), there are conflicts of interest 
that diminish Beijing's ability to cooperate in the region, and Latin 
America's interests in the United States will remain enormous for the 
foreseeable future. We must restore balance to our views of China, a 
balance that does not exaggerate Chinese power while respecting it. 
Washington's relations with our southern neighbors should be a major 
U.S. foreign policy concern; currently, a defensive worry about China's 
regional activities do not rise to the level of a major foreign policy 
concern, particularly given other challenges.
    Second, although Chinese activity in the region can complicate U.S. 
diplomatic life, for example with respect to Cuba and the Chavez 
government in Venezuela, overall Chinese economic activity in the 
region carried out under relatively free trade conditions will boost 
economic well-being in Latin America, though some economic sectors in 
the region will be hurt. A healthier, more diversified Latin America is 
in the interests of the United States. As a matter of principle, if the 
Chinese wish to invest in the Western Hemisphere, as the rest of the 
world is investing in the PRC, this should be welcome.
    And finally, though the focus of this hearing is Chinese activity 
in Latin America, Latin America is not the principal foreign policy 
concern of Beijing. Rather, building ties within the PRC's own region 
and with nations along its periphery is Beijing's central focus, along 
with keeping healthy ties with the United States. Moreover, China is 
trying to improve relations with the EU, Russia, Central Asia, Africa, 
and India. Beijing's still limited capacities for influence are going 
to be spread pretty thin.
    The topic of this hearing leads me to address three sets of issues 
below:

 I. CHINA'S NATIONAL STRATEGY, FOREIGN POLICY, AND ACTIVITIES IN LATIN 
                                AMERICA

    China's National Strategy and Broad Foreign Policy: In our 
pluralized, checks and balances system, it is hard to imagine that a 
complex society can have a fairly coherent national strategy; one that 
embraces both internal development and foreign policy. I believe that 
the PRC does have a broad national strategy, that this strategy has 
implications for internal development and foreign policy, and that 
Beijing is (with remarkable consistency and skill) implementing this 
strategy at home and abroad, though there are problems--sometimes big 
problems. Beijing's policy in Latin America is one reflection of all 
this. Nonetheless, the clarity of the strategy and the overall skill 
with which it is being implemented invites the United States to be 
correspondingly coherent and nimble.
    The PRC's national strategy can be described succinctly and was 
devised by Deng Xiaoping in the late 1970s and early 1980s and evolved 
thereafter: (1) China's future lies in global integration; (2) to be 
globally integrated, the PRC must be economically competitive; (3) to 
become economically competitive requires rapid, sustained economic 
growth, which in turn requires two things--internal stability and an 
absence of large-scale external threat for a long time; (4) with 
respect to the domestic requirements for high-speed economic growth, 
one needs high savings, high domestic and foreign investment, and a 
workforce that has material incentives and higher levels of education; 
(5) in terms of the foreign policy requirements, China needs an absence 
of external military threat (relatively low defense expenditures for a 
sustained period), markets and access abroad, capital and technology 
inputs from abroad, and resources to fuel economic expansion--China has 
less than the global per capita average of almost every single major 
natural resource, including water, petroleum, and other precious 
minerals, not to mention arable land.
    Every day that China's leaders get up in the morning, the first 
thing on their minds is how to meet the internal challenges the country 
faces in maintaining both high-speed growth and tolerable social 
stability. They look at foreign policy from the perspective of 
providing the conditions and resources that will make the management of 
their domestic challenges possible. Foreign policy is a means to 
essentially domestic ends. America's genuine problems with Chinese 
foreign policy stem not principally from a Chinese desire to diminish 
U.S. power, though Beijing would like to see an international system 
more balanced in power terms. Rather, U.S. problems with Chinese 
foreign policy often stem from Beijing's domestically driven policies 
that often ignore the broader consequences of China's actions, or 
nonactions. What do I mean? China needs oil, so it develops relations 
with Sudan, not caring much about the murderous situation in Darfur. 
China wants stability on its borders, so it is reticent to push 
Pyongyang very hard on its nuclear weapons program(s). Beijing needs 
internal cohesion, so sometimes its leaders use anti-Japanese 
nationalism to forge unity at home as, incidentally, do some in Japan. 
Increasingly China and America, in the words of Deputy Secretary of 
State Robert Zoellick, need to act as common ``stakeholders'' in an 
increasingly fragile and interdependent international system. China is 
not out principally to weaken the United States, it is out to meet the 
needs of its people. Beijing needs to pay more attention to the 
international consequences of that effort.
    Beijing's Interests and Activities in Latin America: Latin America 
is a moderately and increasingly important market for inexpensive PRC 
manufactured goods--it provides employment in China. Latin America is 
an important source of agricultural produce such as soya and corn that 
China needs at affordable prices. Latin America is an important source 
of minerals such as iron for the world's biggest consumer of steel and 
a major source of copper--China accounted for 100 percent of global 
demand growth in copper during 1995-2003. Some Latin American countries 
have energy reserves (e.g., Venezuela, Brazil, Bolivia, Peru, and 
Colombia) and China has accounted for about 50 percent of the growth in 
global oil demand in the last 3 years; in 1995-2003 the PRC accounted 
for 68 percent of global oil demand growth. China's emerging middle 
class (perhaps 250 million or more persons if one has a modest 
threshold for middle-class status) is eating more meat, buying more 
houses, and purchasing more automobiles.
    Looking at the Panama Canal, that waterway has facilitated the 
explosive growth in United States-China trade as well as rapid trade 
expansion between China and Latin America itself. In FY 2004, the 
Panama Canal Authority reported that China was the number two origin of 
cargo going through the canal and the number three destination of cargo 
going through the canal. Overall, China was the number two user of the 
canal as measured by the total origin and destination of cargo tonnage 
going through it. It is worth noting, however, that the United States, 
in the number one position, has more than three times the tonnage 
moving through the canal in terms of origin and destination.
    There is another interest for the PRC that is important--Taiwan. 
Taipei has formal diplomatic relations with only 26 countries around 
the world, mostly in the South Pacific, Latin America, the Caribbean, 
and Africa. Fourteen of the thirty-three nations in Latin America and 
the Caribbean recognize the Republic of China (Taipei), and Taiwan's 
own Yearbook describes the region as a diplomatic ``stronghold.''
    Beijing is employing its economic power to provide inducements to 
remaining governments to move into the PRC's diplomatic column, as does 
Taipei which frankly acknowledges that it too ``stimulate[s] investment 
by Taiwanese entrepreneurs in countries with diplomatic ties with 
Taiwan'' [ROC Yearbook]. One will note that when Chinese President Hu 
Jintao visited Latin America in November 2004 and in September 2005, 
there were both signings of investment, trade, and cooperative 
agreements and reaffirmation of each country's support for the ``one 
China policy.''
    Perhaps the most notable thing about PRC activity in Latin America 
is the frequency of visits by senior Chinese leaders--they are paying a 
lot more senior-level attention to the region than is the United 
States. China's Premier Wen Jiabao was in Mexico in late 2003, China's 
President Hu Jintao was in the region in 2004 and 2005, and China's 
Vice President Zeng Qinghong was there in January 2005, not to mention 
innumerable other visits by lower ranking Chinese officials and trade 
groups. For their part, Latin American Presidents and senior officials 
have been trekking to China in great numbers; the Brazilians under 
President Lula are particularly active. The resulting cooperation has 
been extensive, measured in the tens of billions of U.S. dollars in 
promised trade and investment in resource and infrastructure projects 
and signed deals for agricultural imports. In his 2004 speech to the 
Brazilian Congress, President Hu said China would invest up to $100 
billion regionally in the decade to follow. With Argentina and Brazil, 
China is cooperating in high-tech areas such as space and satellite 
projects. Nonetheless, we need to keep this in perspective--in 2003, 
trade with China accounted for only 3.8 percent of Latin America's 
total trade; the United States accounted for 48 percent.

   II. THE POINTS OF FRICTION IN CHINA'S RELATIONS WITH LATIN AMERICA

    There are several areas where Chinese interests and those of 
individual countries in the region are not identical (sometimes 
incompatible); this causes frictions. China's capacity for cooperation 
in Latin America is finite and so while Washington appreciates 
Beijing's assets it also ought to recognize PRC liabilities. Some 
examples:

   In 2004 China was contracted to take delivery of large 
        volumes of soya beans from Brazil, but the global price dropped 
        by around $50 per ton between the contract and delivery dates. 
        Given the volume of beans in transit and their perishable 
        nature, the Chinese erected some health barriers and refused to 
        take timely delivery until renegotiations produced a more 
        satisfactory price. The larger point is that China, as a big 
        importer of food, has an interest in low prices, which is 
        contrary to exporters' interests. This same dynamic will apply 
        to relations with Latin American resource exporters who will 
        want high prices for the commodities that China will want to 
        buy as cheaply as possible. In short, importers and exporters 
        have natural conflicts.
   In a related vein, President Hu Jintao was just in Mexico 
        and the interaction between Mexican President Fox and the 
        Chinese President made it clear that a major point of 
        contention is Mexico's very large trade deficit with the PRC--
        Mexico imported $93 worth of goods from the PRC for every $3 it 
        exported to China. So countries with a trade surplus with 
        Beijing (like Brazil in 2003) will have a different view than 
        nations that run perennial deficits with the PRC.
   During trips to the region by senior Chinese leaders, 
        rhetoric about large future PRC investments is employed, but 
        China remains a poor country in per capita terms and in many 
        cases actual investment in Latin American economies may fall 
        well short of expectations. If this occurs, China's failed 
        promises will not be preferred over the failed promises of 
        others.
   Last week I met with a group of scholars from Mexico who 
        study China. I asked what was on their mind with respect to the 
        PRC and they responded: ``Lots of our manufacturing [has been] 
        lost to China--clothing, toys; it has cost [Mexico] a lot of 
        industry.'' ``Many enterprises are angry [at China].'' ``Medium 
        and small enterprises are not competitive [in Mexico]; labor 
        costs [here in Mexico are too high].'' ``Mexico opposed China's 
        entry into WTO very strongly [till the end], but the Mexican 
        Government can do nothing because of low Chinese wages.'' 
        Different sectors and nations in Latin America will 
        differentially benefit from economic ties with China. Resource 
        extractors and high value-added suppliers will gain--many 
        labor-intensive manufacturers will lose. What economists call 
        ``readjustment'' is called ``unemployment'' and ``insecurity'' 
        by ordinary people. The economic dislocation caused by 
        globalization will create a great deal of friction between the 
        PRC and many in Latin America.
   And finally, a Chinese official who is an observer at the 
        Organization of American States, Cai Runguo, pointed to the 
        cultural barriers that separate China and Latin America: 
        ``Chinese entrepreneurs have very little knowledge of [South 
        America], and when they have begun to invest or explore the 
        possibilities of investment they have encountered 
        difficulties.''

    In short, Beijing will make progress in its relations with Latin 
America, but it will not be frictionless.

              III. U.S. INTERESTS AND A POLICY PERSPECTIVE

    To start, policy recommendations should take account of the overall 
character of the United States-China relationship and the overall 
interests Washington and Beijing have in ties with each other. 
Notwithstanding our many disagreements with the PRC in the trade, human 
rights, proliferation, Taiwan, and other areas, America has a symbiotic 
relationship with the PRC--we need each other. Beijing needs the jobs, 
technology, markets, and the relatively secure external environment 
that the United States can provide. The United States needs cooperation 
on issues like the Global War on Terror and on the North Korean nuclear 
problem, and huge numbers of American families benefit from the low 
interest rates that Beijing helps provide through its purchase of U.S. 
debt instruments. More broadly, there now are three locomotives to the 
world economy--the United States, Europe, and China. Stalled growth or 
widespread disorder in the PRC spilling out into the international 
system would be harmful to everyone. The challenge is to manage all 
aspects of our relationship with Beijing in a way that maximizes the 
benefits and minimizes the costs. As we think about China's interaction 
with Latin America our policy should be devised against this larger 
backdrop.
    Second, China's growing involvement in Latin America is not a 
crisis for U.S. foreign policy. To the degree that it is a subject of 
concern the focus generally should be on increasing U.S. influence and 
positive sway in the region rather than trying to offset what Beijing 
is perceived to be doing.
    And finally, if Washington takes a broad, future-oriented 
perspective on PRC involvement in the region we may be surprised at 
some of the common interests we share. That list of shared or broadly 
compatible interests includes the following:

   If China invests in oil and energy resources in Latin 
        America when others are not prepared to do so, the PRC is 
        contributing to a larger global pool of available energy. Latin 
        American oil brought to the surface by Chinese interests 
        probably will end up in the United States the same way that 
        Asian oil brought to the surface by American interests probably 
        will end up in Japan or China.
   With respect to possible U.N. Security Council reform 
        (expansion), while current members of the P-5 may each have 
        their own favorites (among India, Argentina, Germany, Brazil, 
        South Africa, and Japan) for some form of permanent membership 
        on the Security Council, the United States and China actually 
        agree that reform of that body should be premised on making it 
        more effective. Truth be told, neither Beijing nor Washington 
        wants its veto in the Security Council diluted by additional 
        veto-wielding members, nor its efficiency diminished by too 
        many more members.
   The United States is China's most important export market 
        (including re-exports from Hong Kong, SAR) and getting to the 
        entire eastern half of the U.S. market depends considerably on 
        the Panama Canal. As China builds resource and food relations 
        with the big eastern seaboard nations of Brazil and Argentina, 
        the Canal and free passage through it, assumes ever more 
        importance to Beijing. The idea that the PRC would somehow 
        choose to impair passage through the Canal strikes me as very 
        unrealistic.
   While China's (and Latin America's) interests in reduced 
        tariffs and subsidies for agricultural exports are not 
        identical to Washington's, Washington's preference for low-
        developed country barriers to most developing countries' 
        agricultural exports is close to that of China and stands in 
        stark contrast to the protectionist policies of Europe and 
        Japan that contribute to poverty among the poorer agricultural 
        nations.
   The 2005 annual Pentagon report to Congress on ``The 
        Military Power of the People's Republic of China'' makes clear 
        that China still possesses very limited long-distance 
        conventional power projection capacity and this will remain 
        true for a considerable period of time, though improvements are 
        occurring. It was only in July 2002 that a Chinese naval ship 
        first circumnavigated the globe. There is no Sino-American 
        military competition for influence in Latin America now, nor 
        will there be for the foreseeable future.
   And finally, the United States has an interest in an 
        economically advancing Latin America. As long as the trade 
        flows are dictated by free negotiations between buyers and 
        sellers, there will be mutual benefit and this generally should 
        foster development and welfare to America's south. This, in 
        turn, creates wealthier citizens in Latin America who will have 
        more money to buy what the United States has to sell.

    In short, a zero-sum view in a globalized world is no longer 
appropriate and the Chinese-United States-Latin American interaction is 
a good example of this reality. The broad policy implications are 
twofold. Washington and the U.S. private sector should get more 
involved in Latin America and U.S. observers and policymakers generally 
should be relatively relaxed about Chinese activity there.

    Senator Coleman. Thank you very much, Dr. Lampton.
    Dr. Luft.

STATEMENT OF DR. GAL LUFT, PH.D., CODIRECTOR, INSTITUTE FOR THE 
          ANALYSIS OF GLOBAL SECURITY, WASHINGTON, DC

    Dr. Luft. Thank you, Mr. Chairman.
    Since we are facing a major challenge with regards to 
energy, I will limit my remarks to the field of energy security 
and how China's activities in Latin America affect America's 
energy security. There is no doubt that China's robust economic 
growth has already been felt on the global energy scene and 
contributed substantially to this year's hike in oil prices. 
But no less important is the impact of China's energy 
activities on its relations with the United States and the 
international community at large.
    Energy is today perhaps the main driver of China's recent 
international behavior. Many of China's foreign policies in the 
Middle East, East China Sea, Central Asia, and Africa are 
shaped by its energy expediencies, often at the detriment of 
the United States. China's recent effort to drive the United 
States out of Central Asia and in support of terrorist-sponsor 
regimes like Iran and Sudan just because it needs their oil are 
the latest testimonies of this trend.
    With global reserves of cheaply recoverable oil and gas 
being depleted, China is already competing with the United 
States over the same oil reserves in some of the world's most 
unstable areas.
    When it comes to Latin America, China's demand for oil has 
resulted in a series of deals with a number of countries, 
primarily Peru, Cuba, Ecuador, Bolivia, Argentina, Brazil, 
Mexico, and Venezuela, which is America's fourth largest oil 
supplier.
    Though this hearing focuses on Latin America, I want to 
mention here that there is also a lot of activity going on in 
Canada, our top petroleum supplier.
    I will not go into the full roster of activities. It is all 
in the written testimony. But the main point I want to make 
here is that the single most important thing to remember about 
China's energy acquisitions in the Western Hemisphere is that 
they will eventually make the United States more dependent on 
the Middle East and other volatile areas, and I would like to 
explain why.
    The Western Hemisphere is estimated to hold 13.5 percent of 
the world's proven conventional oil reserves. This amounts to 
about 160 billion barrels of oil, of which 101 billion barrels 
are concentrated in Central and South America, particularly in 
Venezuela, Brazil, Colombia, Ecuador, Argentina, and Peru. 
These countries accounted for 8 percent of total world output 
in 2004. Of the region's largest producers, only Brazil and 
Ecuador still experience production growth. Conventional oil 
production in the rest, namely Peru, Colombia, Argentina, and 
Venezuela, has been declining. The same goes for Mexico.
    According to a study by PFC Energy, non-OPEC Latin 
America--that is excluding Venezuela, of course--will peak 
around 2007 and decline steeply thereafter. Considering the 
projection that in the next 20 years the region's own need for 
oil will nearly double, it seems that Latin America's long-term 
ability to satisfy the needs of the growing United States 
market will be increasingly compromised.
    China's pursuit of Latin American oil will only make 
matters worse. With half of its oil imports coming from the 
Western Hemisphere and with oil imports in the United States 
projected to surge 60 percent during the next two decades, the 
United States cannot afford to lose chunks of Western 
hemispheric crude. Every barrel of oil China buys in the 
Americas means one less barrel of Western hemispheric oil 
available to the United States market. This means that China 
will have to--the United States will have to look for this oil 
elsewhere, and that will be particularly in the Middle East, 
which is contrary to President Bush's pledge to make the United 
States less dependent on, ``places that don't particularly like 
us.'' So when it comes to oil, Mr. Chairman, this is a zero-sum 
game.
    I must add that I am talking about conventional crude. 
There are a lot of reserves of nonconventional crude. I can 
address that, too, and that is part of the reason that China is 
very interested in Venezuela, which holds a vast endowment of 
extra-heavy crude.
    As consumer of a quarter of the world's oil supply, and 
holder of merely 3 percent of global reserves, the United 
States cannot afford to ignore the implications of 1.3 billion 
people who are gradually relinquishing their bicycles in 
exchange for passenger cars. In addition, with its current 
consumption habits the United States lacks the moral authority 
to preach to the Chinese about the need to address their oil 
problems, nor can it ask them to deny their people the high 
standard of living that Americans have been enjoying for 
decades.
    The United States should look inward and begin to seriously 
address its growing addiction to oil and, more broadly, assign 
a large role for energy policy in its global strategy. This can 
only be done through multinational cooperation on energy and a 
joint commitment by the United States, China, and other 
consuming countries to work toward reducing oil dependence 
through efficiency and development of alternative energy 
sources.
    China's interests in Latin America are not restricted to 
petroleum, but also to the continent's alternative fuel market. 
In response to its growing need for fuel, China has decided to 
dive into the alcohol market. Its main focus is sugar-based 
ethanol coming from Brazil and the Caribbean. China is now in 
the process of developing a fleet of flexible-fuel vehicles 
that can run on any combination of gasoline and alcohols and is 
showing strong interest in emerging sugar markets in Central 
and Latin America. I must add that Latin America is for sugar 
what the Middle East is for oil.
    Should oil prices continue to stay high, the United States 
will have no other option but to do the same. Ramping up 
ethanol supply requires incentives for domestic producers, as 
you have done as part of the energy bill, Mr. Chairman. But 
more importantly, it entails opening the biofuels market to 
imports from our neighbors in the Western Hemisphere. Today 
such imports are prevented due to protectionist policies 
enacted by Congress which impose a stiff tariff on ethanol 
imports. Oddly, Mr. Chairman, we are willing to import 
petroleum from Saudi Arabia, but not ethanol from Brazil.
    Blocking ethanol imports to the United States not only 
undermines U.S. energy security, but also has geopolitical 
consequences that this committee should be aware of. While the 
United States could encourage sugargrowers in Latin America and 
Central America to increase their output and become fuel 
suppliers, creating economic interdependence with its 
neighbors, it is China that is doing exactly that.
    This is likely to make our neighbors in the Western 
Hemisphere increasingly dependent on China with regards to the 
agricultural sector, hence strengthening China's foothold in 
America's backyard. Needless to say that such development would 
undermine U.S. energy security in the Western Hemisphere.
    So I urge this committee to take a serious look at how we 
can shift our energy imports from regions that are increasingly 
hostile to the United States to those that have the strongest 
likelihood of being our true allies.
    Thank you.
    [The prepared statement of Dr. Luft follows:]

 Prepare Statement of Dr. Gal Luft, Executive Director, Institute for 
         the Analysis of Global Security (IAGS), Washington, DC

    Mr. Chairman, members of the committee, I would like to thank you 
for inviting me to brief you on China's foreign, economic, and security 
policies, which stem from its growing energy consumption and their 
effects on U.S. interests in Latin America.
    Since it became a net oil importer in 1993, China has traversed the 
globe in a relentless quest for energy sources to fuel its booming 
economy. In recent years its state-owned energy companies concluded oil 
and gas deals in close to 30 countries, many of them in Latin and 
Central America. There is no doubt that China's robust economic growth 
has already been felt on the global energy scene and contributed 
substantially to this year's spike in oil prices that brought oil 
prices to reach the $70 a barrel mark. But no less important is the 
impact of China's energy activities on its relations with the United 
States and the international community at large.
    Energy is the main driver of China's recent international behavior. 
In a lecture at Beijing University in March 2004, its Deputy Foreign 
Minister, Wang Yi, admitted that Chinese foreign policies are ``at the 
service of China's economic development.'' And indeed, many of China's 
foreign policies in the Middle East, the East China Sea, Central Asia, 
and Africa are shaped by its energy expediencies, often to the 
detriment of the United States. China's recent effort to drive the 
United States out of Central Asia and its support of unsavory regimes 
like Iran, Sudan, and Uzbekistan just because it needs their oil, are 
the latest testimonies of this trend.
    China's pursuit of energy resources comes at a time that the world 
is finally waking up to the idea that oil and natural gas are finite 
commodities and that world demand currently and for the foreseeable 
future will exceed world supplies. This reality is becoming 
increasingly accepted by the major oil companies. Earlier this year 
David O'Reilly, chairman and CEO of Chevron Corporation, admitted in an 
open letter that ``the era of easy oil is over. Many of the world's oil 
and gas fields are maturing,'' he wrote, ``and new energy discoveries 
are mainly occurring in places where resources are difficult to 
extract--physically, technically, economically, and politically. When 
growing demand meets tighter supplies, the result is more competition 
for the same resources.'' And indeed, with global reserves of cheaply 
recoverable oil and gas being depleted China is already competing with 
the United States over the same oil reserves in some of the world's 
most unstable areas.
    Former Secretary of State, Henry Kissinger, warned recently that 
the global battle for control of energy resources could become the 
modern equivalent of the colonial disputes of the 19th century.

              CHINA'S ACTIVITIES IN THE WESTERN HEMISPHERE

    Of all the regions of the world where China competes with the 
United States over access to oil, the Westem Hemisphere is perhaps the 
one where the direct impact on U.S. energy security is likely to be 
felt most in the long run. At the moment most of China's oil imports 
come from the Middle East. In 2004 the Western Hemisphere supplied only 
2 percent of the 2.9 million barrels per day China imported. But just 
like the United States, China seeks to diversify its supply sources and 
reduce its dependence on the Middle East. Latin America is, therefore, 
one of the most sought after domains. China's oil thirst has already 
resulted in a series of deals stretching from the southern tip of South 
America to the Caribbean, areas which constitute America's backyard.

   In January 2005, China and Peru signed a memorandum of 
        understanding allowing China to promote investments and 
        technical cooperation in the exploration and export of oil and 
        gas.
   In the same month China Petroleum & Chemical Corporation, or 
        Sinopec signed a production contract with Cuba.
   While U.S. energy companies have grown increasingly 
        disenchanted with the corruption and volatile politics of 
        Ecuador and its energy company Petroecuador, the Chinese seem 
        to be undeterred from investing in drilling and exploration 
        work there. This month EnCana, Canadian Natural Gas Company, 
        agreed to sell oil and pipeline holdings in Ecuador to a 
        Chinese venture for $1.42 billion to fund debt reduction and 
        stock buybacks.
   In Bolivia, Shengli International Petroleum Development has 
        opened an office in the gas-rich eastern region and announced 
        plans to invest up to $1.5 billion.
   Argentina and China signed cooperation deals that could lead 
        to up to $5 billion in investments over the next decade in oil 
        and gas exploration.
   In Brazil, the Chinese President signed 11 bilateral 
        agreements, including planned investment of $10 billion in 
        energy and transportation in the next 2 years. Brazil's state-
        owned Petrobras and China National Offshore Oil have been 
        studying the viability of joint operations in refining, 
        pipelines and exploration in their two countries and in other 
        parts of the world. This comes after a $1 billion Brazilian 
        agreement with another Chinese company, Sinopec, to build a gas 
        pipeline that will run across Brazil.
   Last, but not least, is Venezuela, United States' fourth 
        largest oil supplier. Since April 2002, U.S. relations with 
        Venezuela have become increasingly acrimonious. Venezuela's 
        President Hugo Chavez warned the United States against any 
        interference with Venezuela's internal affairs threatening that 
        Venezuela ``has enough allies on this continent to start a 100-
        year war,'' and that ``U.S. citizens could forget about ever 
        getting Venezuelan oil.'' This threat is not being ignored. 
        Secretary of State Condoleezza Rice remarked in her 
        confirmation hearing that two of her chief worries with regards 
        to Venezuela are U.S. dependence on Venezuelan oil and whether 
        Chavez will continue to supply it. The fissure in the relations 
        enables China to step in and reduce Venezuela's dependence on 
        selling oil to the United States, which currently buys 60 
        percent of Venezuela's crude. A series of oil agreements signed 
        in early 2005 allow Chinese companies to explore for oil and 
        gas and set up refineries in Venezuela. Venezuela's state-run 
        oil company PDVSA opened a marketing office in Beijing and has 
        a target of selling to China 300,000 barrels per day by 2012. 
        But for now Venezuela's oil exports to China are much more 
        limited. The majority of Venezuela's exports to China as of now 
        consist of Orimulsion, a boiler fuel alternative which is 
        burned by powerplants to generate electricity. China's 
        refineries are not equipped to refine Venezuela's crude. 
        Geography is also a constraint. Venezuela has no access to the 
        Pacific shore and the Panama Canal cannot accommodate the 
        biggest tankers. A tanker trip from Venezuela to China takes 45 
        days. But China and Venezuela are trying to resolve these 
        problems. In July 2004 Venezuela signed a contract with 
        Colombia to build a crude oil pipeline connecting its oil 
        fields with a port on Colombia's Pacific coast sparing Chinese 
        tankers the need to traverse the Panama Canal. This could 
        reduce the travel time by half.

    Though this hearing focuses on Latin America it is important to 
note that China has also set its sights on North American oil. In 
January 2005 the Wall Street Journal reported that trade officials in 
Mexico said they see China as a potential growth market for their oil 
exports.
    Chinese state-owned oil companies pursue ambitious deals in Canada, 
the top petroleum supplier to the United States. Canada has emerged as 
the second largest oil reserve in the world due to the drop in price in 
the recovery of crude from the vast reserve of Alberta's tar sands. 
Chinese companies are negotiating the acquisition of Canadian tar sands 
companies and have already bought stakes in a few of them. The Chinese 
PetroChina International signed an agreement with Canada's giant 
pipeline company, Enbridge, to build a $2.5 billion pipeline from 
Alberta to the Pacific coast from where 200,000 barrels of crude a day 
will be shipped to China. The two countries signed the Canada-China 
Statement on Energy Cooperation in the 21st century, promising to work 
closely in the areas of oil, gas, oil sands, energy efficiency, 
environment, and related ventures. Analysis conducted by Institute for 
the Analysis of Global Security shows that if China succeeds in 
acquiring portions of Canada's energy industry up to a third of 
Canada's potential exports to the United States could eventually be 
lost to China.

       IMPLICATIONS OF CHINA'S PURSUIT OF WESTERN HEMISPHERIC OIL

    The single most important thing to remember about China's energy 
acquisitions in the Western Hemisphere is that they will eventually 
make the United States more dependent on the Middle East and other 
volatile areas.
    The Western Hemisphere is estimated to hold 13.5 percent of the 
world's proven conventional oil reserves. This amounts to 162 billion 
barrels of which 101 billion barrels are concentrated in Central and 
Latin America particularly in Venezuela, Brazil, Colombia, Ecuador, 
Argentina, and Peru. These countries accounted for 8 percent of total 
world output in 2004. Of the region's largest producers only Brazil and 
Ecuador still experience production growth. Conventional oil production 
in the rest--Peru, Colombia, Argentina, and Venezuela--has been 
declining. According to a study by the Washington-based energy 
consulting firm PFC Energy, non-OPEC Latin America will peak around 
2007 at 4 million barrels per day and will decline steeply thereafter. 
Considering the projection that in the next 20 years the region's own 
need for oil will nearly double, it seems that Latin America's long-
term ability to satisfy the needs of the growing U.S. market will be 
increasingly compromised. China's pursuit of Latin American oil will 
only make matters worse.
    With half of its oil imports coming from the Western Hemisphere, 
and with oil imports projected to surge 60 percent during the next two 
decades due to demand growth and a decline in domestic crude 
production, the United States cannot afford to lose chunks of Western 
Hemispheric crude.
    Venezuela stated recently that its aim is to supply 20 percent of 
China's oil imports. What does this mean? According to the Energy 
Information Administration China's oil demand in 2025 will stand on 
15mbd with net imports of nearly 11mbd. For Venezuela to provide 20 
percent of China's imports means loss to the U.S. market of 2.2mbd. In 
essence, every barrel of oil China buys in the Americas means one less 
barrel of Western hemispheric oil available for the U.S. market. This 
means that the United States will have to look for this oil elsewhere 
and become more reliant on oil from more remote and less stable 
regions, primarily West Africa, the Caspian and, above all, the 
tumultuous Middle East. This is contrary to President Bush's pledge to 
make the United States less dependent on ``countries that don't 
particularly like us.'' There is also a cost issue. Western hemispheric 
oil is more attractive to the U.S. market because shipping costs are 
low relative to the Middle East and other places. The less we have of 
it, the more we will have to pay as a nation for our oil.
    If the Western Hemisphere has any future in oil production it is in 
the field of nonconventional sources of petroleum such as extra heavy 
oil, tar sands, and oil shale. By 2010 only 4 percent of the world's 
oil will come from nonconventional sources, but clearly the next 
several decades will show an increasing role of these energy sources. 
About 1.2 trillion barrels of extra heavy oil are in place in 
Venezuela. At current technology and prices only 2-3 percent of this 
endowment is economically recoverable but it is likely that 100-270 
billion barrels will eventually be economically recoverable. In Canada, 
there are close to 180 billion barrels which can be derived from 
Alberta's tar sands. Of this endowment, about 20 percent are 
economically recoverable at current market conditions. But shifting to 
nonconventional oil requires enormous investment and a long lead time. 
Furthermore, the energy required for the extraction of such 
nonconventional sources of crude is so huge as to offset the amount of 
energy the extracted oil ultimately yields. Also the cost of production 
is high and there are severe environmental problems. Even if production 
of nonconventional oil increased in proportion to the world's growing 
demand, China and India will seek to buy ever-increasing shares of this 
oil, hence limiting its availability to the U.S. market.

      IMPLICATIONS FOR THE SPREAD OF DEMOCRACY AND THE RULE OF LAW

    Latin America may not become a focus of China's diplomacy. But as 
long as it can offer China's booming economy raw materials and energy 
sources, China's foothold in the region will continue to grow and could 
reach a stage in which it infringes on the longstanding principle in 
U.S. foreign policy of nonintervention in the Western Hemisphere by 
foreign powers. Furthermore, control of energy assets by a Communist 
government could expose U.S. neighbors to Chinese pressure to part ways 
from the United States on issues regarding China, like human rights 
abuses, arms sales, and mainland's relations with Taiwan. Chinese 
penetration into Latin and Central America could also strengthen the 
voices of Marxism and anti-Americanism in a part of the world critical 
to U.S. national security. But perhaps the biggest problem associated 
with China entry into Latin America is impact on America's effort to 
promote democracy and good governance in this part of the world. In 
countries like Sudan, Iran, Myanmar, and Uzbekistan, China's energy 
deals have already undermined U.S. efforts to promote freedom and 
democracy and force improvement in these countries' human rights. 
Unlike the United States, China typically does not address democracy, 
human rights, and nonproliferation issues in its relations with other 
countries. Its state-controlled oil companies are in a position to 
offer large packages of development aid which help secure them access 
to oil and gas assets in many cash-starved developing countries. 
China's penetration into Latin America could create similar problems, 
strengthening the region's nondemocratic regimes. Chinese energy 
companies have another competitive advantage when dealing with the 
Third World, where under-the-table payments can ease the way to a deal: 
They do not have to contend with transparency initiatives nor comply 
with a Foreign Corrupt Practices Act.

                     OPTIONS FOR THE UNITED STATES

    To spare China the need to seek Western hemispheric oil, the United 
States should encourage China to source its energy from countries that 
are geographically closer to it and that are not under the U.S. sphere 
of influence. Russia and Kazakhstan are two oil rich countries which 
share a border with China. Russia is today the world's second largest 
oil producer and supplier of 9 percent of China's oil imports. Earlier 
this month Russia's President, Vladimir Putin, announced that the long 
bidding war between China and Japan on the construction of a pipeline 
to carry oil from eastern Siberia, had been decided in favor of China. 
The pipeline, scheduled to be completed in 2008, will run from Taishet 
to Daqing near the Russia-China border. Kazakhstan supplies only 1.1 
percent of China's oil imports but is capable of doing much more. The 
two countries are soon to be connected by an 1,800-mile pipeline. China 
has acquired oil assets in Kazakhstan and will continue to invest 
heavily in the country over the next two decades. Such energy deals 
will create interdependence between China and its neighbors while 
reducing China's need to seek for energy resources in the Western 
Hemisphere.
    Additionally, the United States should offer to help the Chinese to 
boost their domestic energy supplies, support energy market reforms, 
encourage regional energy cooperation, integrate China into the 
International Energy Agency and make it a key participant in the 
international dialogue on global energy policy. It should also invite 
China to participate in joint research and development aimed at 
displacing imported petroleum with energy sources that both China and 
the United States have available domestically, via utilization of clean 
coal technology, waste-to-liquid-fuels, and advanced nuclear power 
stations. Such cooperation will not only help prevent future conflict 
but it will also foster Sino-American collaboration with significant 
economic benefits for both countries.
    While there is an urgent need for a comprehensive energy strategy 
to deal with China's energy needs such a strategy cannot be based on 
seeking ways to block China's access to oil throughout the world 
including the Western Hemisphere. As a consumer of a quarter of the 
world's oil supply and holder of merely 3 percent of global reserves, 
the United States cannot afford to sit on its hands and hope that the 
world's energy problem resolves itself. In addition, with one of the 
worst fuel efficiency standards in the industrialized world the United 
States lacks the moral authority to preach to the Chinese about the 
need to address their oil problem. Nor can it ask them to deny their 
people the high standard of living that Americans have been enjoying 
for decades. The United States should look inward and begin to 
seriously address its growing addiction to oil and more broadly assign 
a larger role for energy policy in its global strategy.
    This can only be done through multinational cooperation on energy 
and a joint commitment by the United States, China, and the other 
consuming countries to work toward reducing global oil dependence 
through efficiency and development of alternative energy sources.
    Both the United States and China are not rich in oil but they are 
both well endowed with a wealth of other energy sources that can be 
used to displace petroleum in the transportation sector, which accounts 
for two-thirds of U.S. oil consumption and the bulk of the growth in 
oil consumption in the developing world. Both China and the United 
States are rich in coal; both have large cities that generate huge 
amounts of garbage and both have massive agricultural sectors that 
generate billions of tons of biomass. Technology can convert all of 
these resources into transportation fuel. Next generation hybrid 
electric vehicles that can be optionally plugged in, can utilize 
electricity from the grid as a transportation fuel. Just as in the 
United States, less than 3 percent of grid electricity in China is 
generated from oil, so using electricity as a transportation fuel would 
dramatically displace petroleum consumption with coal, natural gas, 
nuclear power, and renewables.
    Were the United States and China to collaborate on advancing such 
technologies and improving efficiency they could gradually curb their 
demand for oil and hence reduce the likelihood of conflict.

                 SEEKING LATIN AMERICA'S SUGAR ALCOHOL

    The Chinese understand what we unfortunately haven't. The answer to 
the energy predicament is manifestly not increased reliance on the 
Saudis and other members of the Organization of Petroleum Exporting 
Countries. Rather, it is to diversify of sources of transportation 
fuels. China's interests in Latin America are, therefore, not 
restricted to petroleum but also to the region's alternative fuel 
market. In response to its growing need for fuel China has decided to 
dive into the alcohol market and its main focus is sugar-based ethanol 
coming from Brazil and the Caribbean. Brazil is the world's leading 
ethanol producer and exporter, distilling nearly 4 billion gallons in 
2004. The country exported half a billion gallons last year but has 
indicated its ability to ramp up ethanol production to meet the 
market's need. China is already the world's third largest ethanol 
producer and is now in the process of developing a fleet of flexible-
fuel vehicles that can run on any combination of gasoline and alcohols.
    El Salvador, Guatemala, Paraguay, Honduras, Colombia, Peru, 
Nicaragua, and Costa Rica have all increased the cultivation of 
sugarcane for ethanol production. China has shown strong interest in 
these markets. The Brazilian energy company Petrobras has already 
started negotiations with the Chinese Government to promote trade in 
fuel alcohol.
    Should oil prices continue to soar, the United States will have no 
other option but to create a fuel choice economy, as Brazil did, in 
which automobiles can run on fuels other than petroleum; ethanol would 
probably be among the most readily available of all alternative fuels. 
Ramping up ethanol supply requires incentives for domestic producers 
but more importantly it entails opening the biofuels market to imports 
from our neighbors in the Western Hemisphere. Today such imports are 
prevented due to a protectionist policy enacted by Congress which 
imposes stiff tariffs on ethanol imports. Oddly, we are willing to 
import petroleum from Saudi Arabia but not ethanol from Brazil. 
Blocking ethanol imports to the United States to protect corn growers 
not only undermines U.S. energy security but also has geopolitical 
consequences. While the United States could encourage sugar growers in 
Latin and Central America to increase their output and become fuel 
suppliers, creating economic interdependence with its neighbors, it is 
China that is doing just that.
    This is likely to make our neighbors in the Western Hemisphere 
increasingly dependent on China hence strengthening China's foothold in 
America's backyard.
    As anti-Americanism spreads across the world it is critical that 
the United States maintain its strategic posture and popular support in 
the Western Hemisphere. This can only be done through increased effort 
to promote democracy, economic reforms, and good governance and, not 
less importantly, by enriching our neighbors and promoting economic 
interconnectedness with them. Energy is one of the areas in which such 
mutually beneficial relations can be easily established.

    Senator Coleman. Thank you. Thank you, Dr. Luft.
    I am going to just touch a little bit on the renewables. 
Representing the largest sugargrowing region in the country, I 
just want to raise that issue. Then I want to get into a range 
of others.
    When I was in Brazil recently, 60 percent of the new cars 
in Brazil are now flex-fuel engines, which means they can run 
on pure ethanol or pure petroleum. I think there are sensors in 
the gas lines that allow them to measure the oxygen content, 
which then changes the compression ratio in the engine, so you 
can run either way. As I understand it, Brazil is not going to 
be importing any foreign oil at the end of 2006.
    Here in the United States, we have doubled the production 
of ethanol in this country in the last energy bill, as you made 
reference to, from 3.87 billion gallons to 7.5. But that is 
still just a drop in the bucket. We have not yet gotten sugar 
into the energy business, and I think the future is there.
    Brazil is using its ethanol domestically. I have not done 
an in-depth study of Brazil, but is Brazil in a situation to 
export ethanol to China and also then to be competitive in the 
United States?
    Dr. Luft. First of all, let me say that there is no reason, 
Mr. Chairman, why every new car sold in the United States 
should not be a flexible-fuel car. This is a very, very cheap 
feature. It costs about $150 a car. There are 4 million cars 
like this already on the road, including Ford Taurus, Mercedes 
C320's, Chevrolet Silverado, Dodge Caravan. People do not even 
know that they have flexible-fuel cars.
    Since it is a very cheap feature and it is very easily 
produced by auto manufacturers, we ought to have a situation 
that all our new cars are capable of running on alternative 
fuels. That includes ethanol and also methanol, that can be 
made also from agricultural products through gasification. This 
is exactly what the Brazilians are doing and their fleet will 
be almost--all their fleet will be running on, or capable of 
running on, ethanol in the next several years.
    Today they already run on 25 percent ethanol in the blend, 
which is great and that really puts them in a situation that 
they are very, very well insulated against shocks. 
Significantly, only 20 percent of Brazil's arable land is 
cultivated. They have said that they can--are in a position to 
produce--and I quote their Minister of Agriculture--``rivers of 
ethanol.''
    The Chinese have set their sights on this. They are already 
building the largest ethanol plants in the world and they are 
building, as I mentioned before, a large fleet of flexible-fuel 
cars. And if we will not preempt them in being in this market, 
they will be there and most of the ethanol will be diverted to 
Asia.
    By the way, Japan is doing the same thing. So I think we 
are missing the boat here and that is very unfortunate because 
every gallon of ethanol can replace a gallon of fuel that we 
are importing from the Middle East.
    Senator Coleman. But one of the things that Brazil did is 
they began this transformation 30 years ago. They developed an 
infrastructure for the delivery of ethanol. I represent a State 
in which I go to my neighborhood gas station. I have a standard 
lease 2005 Ford Explorer that is a flex-fuel engine. They did 
not advertise that. I just looked through the book and there it 
was. I can buy E-85 at the neighborhood gas station at the 
corner of Grand Avenue and Milton in St. Paul, MN. But that is 
pretty unusual.
    Does China have the infrastructure for the delivery of 
ethanol into its auto market?
    Dr. Luft. Well, they are building now. As we are talking, 
there are a number of representatives now from the Republic of 
China here addressing this. They are building refueling 
stations that are capable of handling alcohol fuels. They have 
developed a large fleet of buses that run on methanol, that can 
be made, by the way, also from coal as well as biomass.
    So they are investing in domestic production as well as 
exploring opportunities to import alcohols into their country, 
because we need to remember that China itself is the Saudi 
Arabia of biomass. They have a tremendous endowment of 
agricultural waste that can be converted into fuel.
    Senator Coleman. Let me shift--Dr. Lampton.
    Dr. Lampton. I just wanted to say, this suggests an area 
for cooperation with China that would seem to be in our mutual 
interest. That is energy cooperation, alternative fuels. I have 
looked at what has been said about ethanol and China's interest 
in that to be a very positive thing. If we are competing over 
oil, the more diversified energy sources we can get the better.
    I also should point out that China has just raised its fuel 
efficiency standards for its cars quite substantially. Now, car 
ownership and economic growth are growing so fast that it is 
still generating a huge demand for crude and refined product, 
but China is moving in that way. This is another area of 
cooperation, if we want. Rather than fighting over a finite 
pie, we ought to all be trying to make this pie bigger.
    Senator Coleman. Dr. Lampton, to shift gears a little bit, 
you indicated in your testimony you did not see any Sino-
American military competition in Latin America. Does everyone 
else on the panel agree with that? Mr. Johnson.
    Mr. Johnson. I am not sure that I do not see any 
competition. I think that there is some, that there is an 
effort to establish some ties with Latin American countries, 
and it is what any rising power would want to do around the 
world, because military-to-military relations are a component 
of normal diplomatic ties. They also imply some arms sales and 
the possibility for sales of heavy equipment, such as transport 
aircraft and jet fighters.
    Now, whether or not China is particularly competitive in 
that way is another question altogether. Up until Europe's 
Airbus consortium came on the scene, the United States was the 
preeminent nation on Earth in terms of developing and marketing 
military and commercial aircraft, and, in many ways, it still 
is. I think China is behind the times, but there may be some 
areas in which Chinese arms may be appealing to countries that 
do not have particularly big budgets.
    Senator Coleman. Dr. Lampton.
    Dr. Lampton. Just to add a little, I do not particularly 
disagree with what was just said. What I meant is that China is 
trying to use, particularly in Southeast Asia, South Asia, and 
in Latin America, its military less as a military instrument 
than a diplomatic instrument. I think it is trying to use it to 
reassure. Not only is China increasing its military exchanges 
with Latin American countries, it has just had joint exchanges 
with Britain and France. So I think this is more to be looked 
at almost as diplomacy.
    That gets to the repetitive question that you raised about 
IMET. I think that is where we ought to be competing.
    Senator Coleman. That was my next question to you, 
actually. I wanted to get back to the IMET question. Again, I 
fully understand the intent of the American Service Members 
Protection Act. My concern is that it has had a 
disproportionate effect on Latin America. Anyone on the panel 
want to respond as to why they believe Congress should exempt 
Latin American countries from IMET sanctions? Is the negative 
impact of losing relations exceeding whatever the benefits have 
been?
    Dr. Lampton.
    Dr. Lampton. I am certainly not an expert on that, but it 
seems that we have 30-some countries in Latin America and the 
Caribbean and there might be something other than just a 
blanket policy. I am prepared to believe there are some 
governments we would want to do that with--IMET relations--and 
others we might not wish to. But my general predisposition is 
in the general direction of doing so.
    Senator Coleman. Mr. Johnson.
    Mr. Johnson. Mr. Chairman, I would just like to relate a 
conversation that I had with, I believe, the chief national 
security advisor for Costa Rica's Police and Public Security 
Forces, who told me that because Costa Rica is not a signatory 
of the article 98 letter that it could not receive any IMET 
training, nor could it receive any particularly specialized 
equipment from the United States that would help scan 
containers coming into their ports.
    A lot of arms, drugs, and even people are being found in 
these containers, some of the ones that are being opened. And 
ironically enough, a lot of the people coming out of them are 
Chinese. So this is one of the areas in which it would be in 
our best interest to wield a scalpel instead of a bludgeon.
    Senator Coleman. Let me turn to Venezuela, about which my 
colleague, Senator Nelson, raised some concerns, and I will 
address a question to everybody on the panel. First, if I can, 
a technical question to you, Dr. Luft. You talked about 
Venezuela having a heavy crude. It is my understanding, though, 
that the technical capacity to turn that heavy crude into 
lighter crude is now a lot better than it ever was. Can you 
explain the implications of your comments about heavy crude? Is 
that a limitation on Venezuelans actually strengthening their 
relationship with China?
    Dr. Luft. In the Western Hemisphere there are two large 
reservoirs of heavy crude. One is in Canada in Alberta in the 
form of tar sands. The other one is in Venezuela in the form of 
extra-heavy crude. There is also quite a large endowment of oil 
shale in the United States.
    Now, all of these nonconventional sources of crude will 
amount, by the end of the decade, to about 4 percent of the 
world's oil output. So this is not a lot, and most of it will 
actually come from Canada, the reason being that these are 
very, very expensive and energy-intensive processes.
    If we stay with oil, Mr. Chairman, if the world remains 
with oil as a primary energy currency, we will have to tap into 
these reserves and invest a lot of money, a lot of money in 
infrastructure and conversion processes and refining. The 
refining process is completely different. We have no choice 
because we are running out of conventional crude.
    China is aware of this. They are looking into this market. 
They want to be there as it happens. They want to make sure 
that they are on top of this because they realize that--and by 
the way, their projection for the future of the oil industry 
are pretty dire. Unlike our oil companies that tend to project 
oil to be back at the $27 a barrel, they are talking about much 
higher figures, and that affects their long-term planning.
    That is why they are willing to invest in places and areas 
that we are not willing to invest. Maybe they are right, maybe 
they are wrong. We do not know. But if they are right and we 
are wrong, then we are going to pay a very heavy price.
    Senator Coleman. Continuing on the Venezuelan discussion, I 
get a feeling, as I listened to the earlier panel and some of 
the testimony that has been presented here, that Venezuela does 
not have the capacity to simply cut off its flow to Citgo. 
Economically, it would suffer great consequences.
    And I am wondering if discussions of Venezuela diverting 
oil to China is simply a way of needling the United States. Is 
it one of those ways of taking advantage of competing 
influences in the region? Is there a sense that China's 
interest in the region can be exploited by those who wish to 
confront the United States? I am trying to understand the 
nature of the danger. Is it a verbal thing or is there a real 
threat here that those who wish to hurt United States interests 
in Latin America will use China's interest as a way to further 
their own objectives?
    Dr. Lampton. Let me take an initial stab at your question.
    Senator Coleman. Dr. Lampton, then Mr. Johnson.
    Dr. Lampton. Not so much on the technical side, but I said 
that Latin America----
    Senator Coleman. Is your microphone on?
    Dr. Lampton. I said that this is not so much a comment on 
the technical side as the political side, and I said in my 
testimony that I did not think Latin America was the most 
important foreign policy focus for China. If I had been asked 
what is the most important foreign policy focus for China, it 
is the United States and then China's own region.
    Quite frankly, I think the Chinese are probably somewhat 
embarrassed by some of the anti-American bombast from Mr. 
Chavez. They are trying to make relations with the United 
States smoother. In the earlier panel the secretary pointed out 
that indeed the Chinese had said their purpose was not to 
divert oil from Venezuela to China, and I think that is just 
one reflection of this effort.
    So my reading of it would be that we are listening to 
rhetoric designed for a domestic political audience in 
Venezuela and not designed for action, and the people that they 
are proposing to act with--China--do not want to act with them.
    Senator Coleman. Mr. Johnson.
    Mr. Johnson. My sense goes kind of along those lines. I 
would agree that I think the United States is China's priority. 
But in looking at the patterns of Chinese commerce with Latin 
America, I would have to say that the Chinese seem to be equal 
opportunity consumers. They will buy from whomever they can get 
their product from, and it does not matter if it is somebody 
who may be disagreeable or somebody who may not be necessarily 
a friend of the United States. We have two countries in Latin 
America, Cuba, and Venezuela, that are openly hostile, that are 
openly adversaries of the United States. That does not stop 
China from dealing with them and obviously trying to have 
relations that work to their advantage. They see things 
differently.
    Another thing I would keep my eye on is whether or not 
there may ever be a Chinese role, not in Venezuela but in 
Bolivia, in the future. Right now the interests there seem to 
be more Brazilian and Spanish and European, and of course the 
United States is interested in what happens to the gas fields 
in Tarika. But at the same time, if you look at the declining 
interest that socialist leaders in Latin America have in terms 
of commerce with Western nations, China might be a more 
acceptable foreign buyer for Bolivian gas, to say, a future 
(socialist) President Morales.
    Those are things that are difficult to predict. But, 
obviously, there is an ideological component that may not be 
present necessarily with China, but is certainly there with 
potential adversaries that we have in our own backyard.
    Senator Coleman. Dr. Luft.
    Dr. Luft. I just want to focus on, not on the statement by 
Hugo Chavez, but on the work plan of Venezuela's oil industry, 
Minister of Energy, et cetera. They are talking about sending 
300,000 barrels to China by 2012. More importantly, they are 
talking very, very openly, and have said so in numerous 
occasions, that they would like to see, by the end of the day, 
Venezuela being the source of 20 percent of China's imported 
oil.
    Now, let's look what it means. If we look at the trajectory 
of China's demand for oil, we see that by 2025 they will need 
15 million barrels a day, out of which about 11 million barrels 
a day will be imported. Twenty percent, Mr. Chairman, of 11 
million barrels a day, that is 2.2 million barrels; 2.2 million 
barrels a day that Venezuela is telling us that they would like 
to see them sending to China.
    Now, question number one: Can our economy afford to, 
considering our growth rate, considering our growing demand for 
it, can we afford to lose 2.2 million barrels a day? I do not 
think so.
    Another question is: Can those extra-heavy processes, all 
those things, meet the rising demand? Can they fill in the gap? 
That is the issue here. That is the question. I am not so sure 
that we can do it on time.
    Senator Coleman. Dr. Lampton.
    Dr. Lampton. Several times you have said that oil is zero-
sum, and if Venezuelan oil was the only oil in the world, I 
would agree. But, in fact, there are many suppliers and they 
are going to have to move that Venezuelan oil at a pretty heavy 
transportation cost, and that was explained in terms of days of 
transport, and that is going to cost the Chinese more. They can 
buy oil out of Burma, which presents its own problems to our 
foreign policy; they can buy from Indonesia. They are going to 
liquefied natural gas.
    So, I just do not see it as zero-sum. In the end, we want 
to keep the prices as low as possible and certainly we do not 
want it higher cost. But the United States has plenty of 
choices about where to buy oil and everybody else does. So, I 
do not see it as zero-sum. I think that is a misconception.
    Dr. Luft. Well, our policy is that we want to reduce our 
dependence on countries that do not like us. If that is the 
purpose, then we have a problem here. If we do not care who we 
buy our oil from, then it is a different debate. But I believe 
that this administration's policy is to reduce our dependence 
on the Middle East.
    Senator Coleman. I would be remiss if we concluded this 
hearing and did not talk about IPR. China is ground zero when 
it comes to the piracy of intellectual property. I believe two-
thirds of Brazil's counterfeit goods apparently come from 
China. There is concern that a lot of that is transited over 
the lawless triborder region between Brazil and Paraguay and 
Argentina.
    When I was in Brazil not too long ago, I attended a 
conference on IPR, and after years of looking the other way it 
seems that Brazil is making an effort to turn the corner with 
regard to IPR protections.
    So my question is, how does the growing Chinese 
relationship and influence, particularly in Brazil but in Latin 
America, how does that impact the IPR issue? Do we have any 
leverage in dealing with China regarding IPR issues in our 
neighborhood? I will open it up. Dr. Lampton.
    Dr. Lampton. This is really one of the core issues. This is 
a global issue with China. We have got a problem with IPR 
violation as it pertains to the sale of products in China. But 
what is even more distressing is the production of counterfeit 
items in China and then the contamination in third markets that 
we would otherwise have.
    So I think this is really a key. The United States as I 
would understand the State Department's policy and the Special 
Trade Representative and so on, have placed this very high on 
our priority list, and I think this is really one of the major 
issues. We ought to not only target China itself, but those 
criminal syndicates and governments that are cooperating or 
turning a blind eye to this.
    This strikes me as the key to the United States moving up 
the value-added chain--our intellectual property. That is what 
is going to make us competitive. We are not going to compete 
with the Chinese on low labor costs. I sure hope we are not. So 
the key is intellectual property. I think that ought to be 
right up there in the number one category of our concerns, both 
with China directly and its operation in third countries.
    Senator Coleman. What kind of leverage so we have? I would 
like to hear from everyone and then I will do a followup 
question. Mr. Johnson.
    Mr. Johnson. Just on top of that, I would just like to 
commend the Senate and the House of Representatives and the 
administration for the work it has done in its relations with 
Paraguay in helping make our relationship with that country 
more comprehensive, because that has helped in some measure to 
try and close down some of the contraband activities in the 
triborder area. If we did not have that kind of a comprehensive 
relationship with them, recent progress would not have 
happened.
    Senator Coleman. Let us just get back to one more approach 
to this question. Maybe it is not a Latin America problem, it 
is simply a problem. It is a problem all over. But in regard to 
Latin America, is there anything that we can do vis-a-vis 
piracy in Brazil that is being fed by Chinese product, any 
steps America can take to deal with that issue?
    Dr. Lampton. Well, your question probably calls for a level 
of expertise I do not have. But I know what we are doing with 
respect to China itself and maybe this has applicability. Many 
of the customs services around the world lack, and immigration 
and border control and so on, lack a lot of tools; training, 
legal advice, and so forth. So once again, we end up in the 
realm of exchange. But our government has very active exchanges 
in intellectual property with many countries around the world, 
and I would look for those particular offenders in South 
America and Latin America that are particular problems where we 
can cooperate with their law enforcement and border control and 
so forth.
    So to the degree that knowledge is the problem, as opposed 
to something else, I would like to see us cooperate more there.
    Senator Coleman. Thank you.
    Mr. Johnson, and I will end on this note, I appreciate your 
comment about the more comprehensive relationship with 
Paraguay. The government there is trying to make a difference. 
You keep coming back to this phrase, ``comprehensive.'' Maybe 
that is a good note to end on, that in our relationships with 
Latin America it is about comprehensive relationships. In 
Colombia, it is about drugs, but it is not just about drugs. We 
have a direct interest in the economic vitality of Colombia and 
business coming back. Obviously, that is dependent upon 
security, and so, in what we have done with Plan Colombia and 
now Plan Colombia II, we have to keep in mind this 
comprehensive approach.
    I would suspect that with our other neighbors in Latin 
America it is the same concept. To us, Latin America is not 
just a market for resources. I wonder with the Chinese whether 
that resource market is at the core. But for a whole range of 
other reasons--the first panel talked about the longstanding 
relationships, the shared culture, the heritage--we have some 
tremendous opportunities and advantages in Latin America if we 
work on them and we develop them. We should not worry about 
China as our ``competitor''; we should keep an eye on what is 
going on, and realize that there are aspects to the 
relationship that we need to develop.
    Is that a fair summation of what you mentioned when you 
talked about comprehensive relationships?
    Mr. Johnson. Yes; that is exactly it. And we went through a 
period in the 1990s where we shrank back, and understandably 
so, because, looking at the other priorities that we had in the 
world, we had the collapse of the Soviet Union, we had problems 
at the end of the 1990s that were beginning to happen in the 
Middle East.
    So it is hard to say that one region should be more 
important than the other. But in Central and South America, we 
pulled a lot of our programs that were of a comprehensive 
nature when it was important to try and go beyond the 
inactivity that we had for decades and try to encourage 
democracy and open markets and better relations with these 
countries.
    So in doing so, in turning--in reducing the programs that 
we had, we tended to concentrate solely on counternarcotics. 
That was a big issue. That was sellable at home. American 
constituents understood it a lot better than such concepts as 
why rule of law is something that is in our interest in 
Ecuador, for interest.
    But now I think that the model that we have in Colombia--
perhaps we cannot do it on that scale in other countries, 
investing that amount of money, but certainly we can try to 
replicate the extent to which we engage different areas of 
society and government and institutions to be a kind of a 
helping hand, because to the extent that we repeat that 
elsewhere, then the rising tide may lift more boats.
    Senator Coleman. And in many ways the concern about China 
in the hemisphere is actually fostering that more comprehensive 
discussion. If you look at the debate about CAFTA, I think 
there were some people who say that if we did not pass CAFTA it 
would benefit China, that we would be giving away market 
opportunities.
    As we look to the possibility of an Andean trade agreement 
and an agreement with Panama, I think the same discussion comes 
into play: Do we want to just give away market opportunities or 
do we want to develop them? Yet, to develop them, we, in 
addition, have to see things like commitment to rule of law. We 
have to see respect for intellectual property rights, we have 
to see issues dealing with labor agreements and other things 
that need to be part of our treaty arrangements. So in many 
ways the Chinese relationship is actually spurring perhaps a 
greater unity.
    This has been a very, very informative hearing, very 
helpful to me. I will share this with other members of the 
committee. The testimony has been much more optimistic than I, 
perhaps, would have anticipated. Prior to coming into this, the 
sense I had was that those involved in the business community 
see China and its development and the role it is playing in 
Latin America as presenting opportunity. For those focused on 
foreign policy and defense issues, I think there is some 
question of fear and concern. My take on this hearing is that 
the opportunity is there. It is always good to be concerned, 
but on the other hand, hopefully, if done right, the 
opportunity can trump the fear.
    So with that, I will leave the record open for 7 days, so 
if there are any additional questions my colleagues have, 
gentlemen, I will make sure they contact you. But if not, this 
hearing is now adjourned.
    [Whereupon, at 4:37 p.m., the subcommittee was adjourned.]
                              ----------                              

             Additional Statement Submitted for the Record

   Prepared Statement of David Hale, Hale Advisers, LLC, Chicago, IL

    There is now growing concern in Washington about the rise of China 
as an economic power in Latin America. China has been announcing major 
investments in the region's natural resource industries. The Chinese 
Government has promised to spend billions helping to upgrade the 
region's infrastructure in order to facilitate trade. China has applied 
for membership in the Inter-American Development Bank. China has been 
lobbying countries in the Caribbean to end their traditional 
relationship with Taiwan and recognize the Beijing government instead.
    China's new focus on Latin America is the result of the 
transformation which has occurred in her economic status during the 
past few years. China has displaced the United States as the world's 
largest consumer of most industrial raw materials, including copper, 
aluminum, nickel, platinum, and iron ore. China's steel industry now 
generates more output than the United States and Japan combined. The 
market capitalization of China's steel industry is over $40 billion 
compared to $11 billion for the U.S. steel industry. In 2003 China 
produced 40 percent of the world's cement compared to 6 percent for the 
United States. While China now consumes 22 percent of global copper 
output and 11 percent of nickel output, its per capita consumption of 
most materials is still equal to only about 20 percent of U.S. per 
capita consumption. As a result, China's continuing economic 
development could cause her share of global metals consumption to rise 
to the 35- to 40-percent range during the next two decades. At current 
growth rates, there can be little doubt that China will be the dominant 
price setter for most commodities in the future, not America and 
Europe.
    There are several factors driving China's explosive demand for raw 
materials. During the past decade, China has attracted over $500 
billion of foreign direct investment. Foreign firms are turning China 
into an export powerhouse. The country now generates 6 percent of 
global exports and could become the world's largest exporter within 3 
years. Foreign firms produce over 55 percent of China's exports. China 
is also going through a process of urbanization which will generate 
huge construction activity. At present, the country is 38 percent urban 
and 62 percent rural. In 30 years, this ratio could reverse. When the 
United States urbanized during the first half of the 20th century, its 
per capita steel consumption increased sixfold.
    China's emergence as the world's largest commodity importer has 
profound implications for her relationship with Latin America. The 
continent still depends heavily upon raw materials for export income, 
so China's demand for raw materials will have an important influence on 
Latin America's terms of trade. The emergence of a country which could 
rival the dominance of the American economy will also have long-term 
consequences for foreign policy and other strategic concerns.
    During the second quarter of 2004, both Brazilian President Lulu 
and Argentine President Kirchner paid visits to China in order to 
promote closer economic and political relations. These visits provide 
useful insights into how the future relationship is likely to evolve.
    President Lula said that he wanted to create a ``strategic 
partnership'' with China as an offset to American power. Mr. Lula is 
anxious to create a more multipolar world in which leading developing 
countries, such as Brazil, India, and South Africa, could play a 
prominent role. He views China as a successful developing country which 
could bolster his proposed coalition. China, by contrast, no longer 
regards itself as just a regional power or emerging market country. It 
increasingly perceives itself on a fast track to great power status. As 
a result, it views Brazil as less of a foreign policy partner and more 
as a potential source of critical raw materials.
    Trade between Brazil and China is growing rapidly. Five years ago, 
China was Brazil's 15th largest trading partner. It will soon be number 
two. In 2003, bilateral trade was $7.8 billion, with Brazil exporting 
$4.3 billion of goods to China. China has emerged as a major market for 
Brazilian soybeans and steel. China also recently announced plans for a 
$2 billion investment in the Brazilian aluminum industry and $1.5 
billion in the steel sector. Sinopec is looking for a partner to build 
an oil refinery as well. During the recent visit, President Lula asked 
China to consider large investments in the development of Brazil's 
infrastructure, including rail links to the Pacific and new highways. 
As a result of the need for raw materials. Chinese firms are now making 
investments in countries as diverse as Angola, Algeria, Papua New 
Guinea, Australia, and Indonesia. Brazil's great endowment of mineral 
resources and agricultural land make her a natural partner for Chinese 
foreign investment.
    President Kirchner visited Brazil 6 weeks after President Lula. He 
focused less on foreign policy themes and more on economic cooperation. 
In 2003, Argentine exports to China grew 143 percent to $2.5 billion. 
The dominant export was soybeans and soya oil ($2.1 billion) followed 
by metallurgy products. President Kirchner proposed new forms of 
bilateral cooperation in agriculture, civil aviation, investment, 
culture, and health. As an immediate result, Aerolinas Argentinas 
announced that it will begin operating flights between Beijing and 
Buenos Aires. At the same time Argentine Planning Minister Julio De 
Vido announced that China had committed to $275 million of 
infrastructure investment, including $25 million for a grain port in 
Sante Fe and $250 million to construct a road from San Juan Province 
through Chile, facilitating exports from Chile's Pacific Port of 
Comquimbo.
    President Hu Jintao used his visit to Latin America during November 
to announce several new initiatives. He told the Brazilians China would 
be willing to invest $8.5 billion in their railways, ports, and 
highways. He announced a major infrastructure investment program for 
Argentina, including $8 billion for railways, $6 billion for low-cost 
housing, $5 billion for hydrocarbons, $450 billion for communications, 
and $260 million for satellite technology. Mr. Hu also announced plans 
to open China's market to exports of Brazilian beef, chicken, and pork, 
and Argentine beef and fruit. Mr. Hu announced as well that China would 
recognize Brazil and Argentina as official tourist destinations, 
opening up both countries to China's 20 million international tourists. 
Argentina offered to open 140 tourist offices in China to facilitate 
the growth of tourism. Brazil and Argentina responded to the Chinese 
initiatives by agreeing to recognize China as a market economy. This 
was a major development for China because it is striving to get 
recognition as a market economy in order to lessen the risk of 
protectionist trade policies against its exports. At present fewer than 
10 countries recognize China as a market economy. Brazilian and 
Argentine manufacturers were concerned about this decision because they 
fear it could open their domestic markets to a flood of cheap imports 
in sectors such as textiles and consumer electronics. There are 
currently 15 antidumping measures in place against Chinese goods in 
Argentina; under the terms of the new agreement, only barriers on 
sensitive products such as toys and textiles will be permitted. The 
Brazilians are also concerned about the fact that China invoked 
concerns about fungicide contamination to block imports of Brazilian 
soybeans at a time when market prices were falling rapidly. The 
Brazilians perceive that China used this excuse to block imports in 
order to get a lower price.
    Now that China is the world's largest oil consumer, she is striving 
to obtain new oil supplies all over the world. As a result of the Hu 
Jintao visit, China will make new investments in the Brazilian and 
Argentine energy sectors. China's National Petroleum Company will 
develop a gas pipeline linking the northeast of Brazil to Rio with 
Petrobas and the National Development Bank. In Argentina, China's oil 
companies will engage in exploration and development activities with 
Enarsa, Argentina's new state oil company.
    In January, President Hugo Chavez of Venezuela visited Beijing to 
promote more Chinese investment in his country. Chavez has a bad 
relationship with the United States and is anxious to diversify his 
country's trade. In August, China National Petroleum Corporation 
announced plans to develop Venezuela Zumano oilfields. The field has 
large reserves of both oil and natural gas. The Venezuelan Government 
says that it hopes to supply 15-20 percent of China's petroleum needs 
in 10 years. As Venezuela produces primarily heavy oil, it is not clear 
that China will be an easy market for the Venezuelan output but Hugo 
Chavez will take every step necessary to promote trade with China.
    Chile is also anxious to promote new trade and investment links 
with China. The two countries announced plans to create a joint 
commission to promote more investment and trade in the mining sector. 
At the APEC summit, Chile and China formally announced they would 
launch negotiations to create a free trade area during the next 2 
years. China currently produces 4.9 million tonnes of copper and 
exports 850,000 tonnes to China. If the two countries could sign an 
FTA, it would help to bolster exports of noncommodity products such as 
Chilean wine to China. In 2003, China exported $1.28 billion of goods 
to Chile and imported commodities worth $2.24 billion. It is widely 
estimated that two-way trade could reach $10 billion in 5 years if the 
two countries had an FTA.
    The recent interaction between China and Latin America is a natural 
outgrowth of China's need for imports of soybeans, steel, copper, and 
other raw materials. What remains to be seen is how China will adjust 
its long-term foreign policy agenda to reflect its new status as the 
world's leading consumer of commodities.
    China is now pursuing potential free trade agreements with several 
countries to enhance its access to raw materials, including Australia, 
New Zealand, South Africa, and the Persian Gulf countries, as well as 
Chile. In the 1990s, the U.S. Government lobbied hard to prevent China 
from selling nuclear weapons to Iran and other Middle Eastern countries 
in return for oil and natural gas. China recently signed a 
nonproliferation treaty which will prevent her from selling nuclear 
weapons to all countries, but she could still use her military power to 
promote improved access to raw materials. China, for example, now has 
4,000 troops in the Sudan to protect an oil pipeline which her 
companies built there 5 years ago. Sudan has been in the midst of a 
civil war for several years, so China wants to use its own troops to 
guarantee the safety of the pipeline. As China promotes new investment 
in other developing countries, such as Zambia, Zimbabwe, Papua New 
Guinea, and Angola, it is not difficult to imagine some governments 
seeking military alliances in order to enhance their domestic political 
positions.
    The United States and other major industrial countries have not 
recognized the potential consequences of China's new status in the 
commodity markets. Japan is aware of it because she has been competing 
with China for the right to control a pipeline carrying Russian oil to 
the Pacific coast. The Chinese made the mistake of signing a joint 
venture agreement with Yukos while Japan focused on the government 
controlled pipeline monopoly, so Japan is likely to control this new 
$10 billion project. But President Putin has suggested that he will 
build an auxiliary pipeline to northern China as well. The Chinese 
recently beat the Americans in obtaining new oil exploration rights in 
Saudi Arabia but the relationship between the United States and the 
Saudis is under pressure because of other concerns, such as the war 
against terrorism. The issue of oil reserves is less dominant than it 
might have been during the 1990s.
    At the start of the decade, some Asian countries were alarmed about 
China's rise because they perceived that China would gobble up all the 
foreign direct investment in the region. While they are still concerned 
about China's FDI boom, they have enjoyed such robust export growth to 
China that they now regard China as a partner rather than a threat. 
Latin America is going through the same evolution.
    The Latin American country which is most alarmed about the rise of 
China is Mexico. The Mexicans fear that China's FDI boom is drawing 
both capital and jobs from their country. During the past 4 years, the 
Maquiladoras zone has lost about 250,000 jobs in part because of firms 
moving to Asia. In 2003, China displaced Mexico as the number two 
trading partner of the United States. In 2005, Mexico will probably 
account for 11-12 percent of U.S. imports while China could be 
exceeding 13 percent. Mexico was the last country to sign the treaty 
for China's membership of the WTO because of concerns about the 
competitive challenge which China poses. Mexico's problem is that it 
does not have a natural resource endowment conducive to the kind of 
export boom which Brazil and Argentina are now enjoying. It is not a 
major exporter of soybeans, copper, or steel. It instead competes with 
China in sectors such as textiles, furniture, and auto parts.
    Some Mexican textile companies have moved factories to China. What 
remains to be seen is whether Mexican companies will be able to form 
joint ventures with Chinese companies to penetrate both the domestic 
market of China as well as to re-export goods back to North America. At 
present, about 60 percent of China's imports are goods used for 
developing products which are re-exported. Most of these imports come 
from other Asian countries. Mexican firms should also strive to get 
into the global supply chain which now runs through China.
    China has recently applied to join the Inter-American Development 
Bank. If she joins the group, her construction companies will be 
eligible to participate in projects funded by the bank. Membership 
would also provide China with a new channel for playing a role in the 
region. The United States is cautious about allowing China to join but 
other Latin American countries are supporting the Chinese bid because 
of their rapidly growing trade with China.
    In the 16th, 17th, and 18th centuries, China emerged as a major 
market for Latin America silver. During that era, the countries of 
Europe were anxious to import Chinese silk, porcelain, and tea but had 
few products to sell in return. The result was that they exported 
silver from the mines of Mexico, Peru, and Bolivia. At the end of the 
18th century, China had over one-third of the world's silver reserves. 
When the supply of silver declined, the British substituted opium and 
fought a war to guarantee their access to the Chinese market.
    At the dawn of the 21st century, there are no constraints on trade 
between China and other countries. China has an insatiable appetite for 
commodities as well as many industrial capital goods for developing her 
economy. Latin America is rapidly emerging as an important source of 
raw materials for China's booming economy. The challenge for Latin 
America will be developing opportunities for broadening its trade to 
include more exports of manufactured goods as well as to promote 
services such as tourism. The governments of Latin America have taken 
initial steps to capitalize on the China opportunity. But they, along 
with other countries, are still at only the early stages of coming to 
terms with a historic transformation.

                                  
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