```

[Senate Hearing 109-239]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 109-239
 
     THE EMERGENCE OF CHINA THROUGHOUT ASIA: SECURITY AND ECONOMIC 
                   CONSEQUENCES FOR THE UNITED STATES

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

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON EAST ASIAN
                          AND PACIFIC AFFAIRS

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 7, 2005

                               __________

       Printed for the use of the Committee on Foreign Relations

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

                    U.S. GOVERNMENT PRINTING OFFICE
25-358                      WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                     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 EAST ASIAN
                          AND PACIFIC AFFAIRS

                    LISA MURKOWSKI, Alaska, Chairman

LAMAR ALEXANDER, Tennessee           JOHN F. KERRY, Massachusetts
CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         RUSSELL D. FEINGOLD, Wisconsin
GEORGE ALLEN, Virginia               BARACK OBAMA, Illinois

                                  (ii)

                            C O N T E N T S

                              ----------                              
                                                                   Page

Dalpino, Catharin E., Adjunct Professor of Southeast Asian 
  Studies, Edmund A. Walsh School of Foreign Service, Georgetown 
  University, School of Advanced International Studies, Johns 
  Hopkins University, Washington, D.C............................    46
    Prepared statement...........................................    49

Herberg, Mike, Director, Asian Energy Security Program, The 
  National Bureau of Asian Research, Seattle, Washington.........    38
    Prepared statement...........................................    40

Hill, Christopher, Assistant Secretary for East Asia and the 
  Pacific, Department of State...................................    11
    Prepared statement...........................................    13

Murkowski, Hon. Lisa, U.S. Senator from Alaska...................     1

Obama, Hon. Barack, U.S. Senator from Illinois...................    10

Pei, Minxin, Senior Associate, Carnegie Endowment for 
  International Peace, Washington, D.C...........................    32
    Prepared statement...........................................    33

            Additional Information Submitted for the Record

Statement submitted by David Lampton, Dean of Faculty and 
  Director of China Studies, School of Advanced International 
  Studies, Johns Hopkins University, Washington, D.C.............     4

                                 (iii)

                         THE EMERGENCE OF CHINA
                     THROUGHOUT ASIA: SECURITY AND
                       ECONOMIC CONSEQUENCES FOR
                           THE UNITED STATES

                              ----------                              

                         Tuesday, June 7, 2005

                               U.S. Senate,
    Subcommittee on East Asian and Pacific Affairs,
                            Committee on Foreign Relations,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:35 p.m. in 
Room SD-419, Dirksen Senate Office Building, Hon. Lisa 
Murkowski, Chairman of the subcommittee, presiding.
    Present: Senators Murkowski, Voinovich, Feingold, and 
Obama.

           OPENING STATEMENT OF HON. LISA MURKOWSKI,
                    U.S. SENATOR FROM ALASKA

    Senator Murkowski. We will call to order the Subcommittee 
on East Asia and the Pacific. We would like to welcome all of 
you here this afternoon. The topic of today's hearing is The 
Emergence of China Throughout Asia: Security and Economic 
Consequences for the United States.
    We have two panels with us this afternoon. The first panel, 
we are honored to be joined by the Assistant Secretary of State 
for East Asia and the Pacific, Mr. Chris Hill. Welcome to you. 
Our second panel features Mikkal Herberg, with the National 
Bureau of Asian Research, who has done a considerable amount of 
research into China's growing energy needs. We also have 
Catharin Dalpino, an Adjunct Professor of Southeast Asian 
Studies at Georgetown and the George Washington Universities, 
who recently completed a survey of China's growth in Southeast 
Asia, and Dr. Minxin Pei, a Senior Associate with the Carnegie 
Endowment for International Peace, who has been published 
extensively on China's economic, legal, and political reforms.
    I had also hoped to have a representative from the 
Department of Defense with us, as well, but I understand a 
security conference in Singapore, attended by Secretary 
Rumsfeld this past weekend, has occupied those officials who 
focus on East Asia and the Pacific. I do appreciate that 
Secretary Rumsfeld's focus on China's military buildup makes 
this hearing all that more timely.
    Now, the purpose of today's hearing is not to air 
grievances about China or to discuss ways to contain China's 
development. The intent is, rather, to take a broad view of 
China's growth in the East Asia region, what that growth means 
for the U.S., and what policy decisions should be taken to 
maintain and grow our presence in the region politically, 
economically, and militarily.
    Individual actions by China around the region may not, in 
themselves, seem particularly significant, but, taken together, 
it is clear that China is moving forward with a long-term 
strategy to promulgate its influence. Whatever name you want to 
give it, whether it is charm offensive, smile strategy, 
peaceful rise, or development, it is proving to be effective.
    China has replaced the United States as Japan, South Korea, 
and Taiwan's largest trading partner. In just the past few 
months, China agreed to invest $10 billion in Indonesia as part 
of a new strategic agreement. President Hu met with two 
Taiwanese opposition leaders, and Beijing and Manila signed two 
agreements to foster better military and security cooperation.
    Premier Wen's visit to India in April sought to defuse 
border tensions and led to the announcement of a strategic 
partnership to improve economic cooperation and bilateral ties. 
China and India are renovating the old Stillwell Road built by 
the U.S. and China during World War II and named after the U.S. 
Commander of Allied Forces for the China/Burma/India theater. 
The Stillwell Road stretches from Southern China through a good 
portion of Burma and into Northeast India and will facilitate 
increased commercial and military ties, not just between China 
and India, but all Southeast Asia.
    China is also helping Pakistan develop the port of Gwadar, 
near the Iranian border, as it seeks friendly ports of call in 
Southeast Asia. And China plays a central role in the six-
member Shanghai Cooperation Organization that is focused on 
combating terrorism in the region.
    You throw in China's willingness to allow tensions with 
Japan to escalate, and it is clear that China is looking to 
exert its influence in the foreign policy area. The bottom line 
is that China has a plan and they are successfully implementing 
it.
    Our question today is, what is the United States' plan as 
it relates to that? What does China's increasing influence mean 
for United States security concerns, and how does that impact 
our relations with our traditional allies?
    U.S. and China interests do not always coincide. Will Asian 
nations be willing to offend their large neighbor to advance 
U.S. interests? It is not as if they can pack up their country 
and move in order to avoid potential conflict.
    From a security standpoint, China's development of a blue-
water navy raises concerns about our commitments under the 
Taiwan Relations Act and control of certain trade chokepoints--
namely, the Strait of Malacca.
    On the economic front, just last week the USA Today 
reported that China's investment in North Korea jumped from 
$1.3 million in 2003 to $200 million last year, yet China has 
not indicated a willingness to use its economic influence to 
bring North Korea back to the Six-Party Talks. So, where will 
it use its economic influence? With Japan and South Korea now 
more trade dependent on China than the U.S., does that impact 
the United States' ability to promote its interests in the 
region?
    China runs a trade surplus with each of the world's three 
largest economic centers--the U.S., the European Union, and 
Japan--yet because of their heavy purchases of raw materials 
from neighboring countries, some analysts believe China's 
global trade surplus will fall to zero in the next few years. 
So, those countries who export raw materials enjoy a trade 
surplus with China. How does that impact their interests?
    At the same time, the U.S. economy remains a strength. We 
have been the driving force for the global economy for some 
time. Even as China is experiencing 9 to 10 percent annual 
growth rates, signs are appearing that China is seeking to cool 
its economy before it overheats. But could that cool-down 
result in a hard landing for other countries in the region that 
rely on exports to China?
    Foreign-funded enterprises now account for about 55 percent 
of China's exports and imports. The United States consumer 
contributes to all of Asia's prosperity by buying goods made in 
Chinese factories, which, in turn, purchase components and raw 
materials from Asian suppliers. If there is a protectionist 
backlash in the U.S. at Chinese imports, it does not impact 
just China, but all nations whose companies export raw 
materials to China.
    On the energy front, my state of Alaska is rich in natural 
resources. Our state budget is heavily impacted by the price of 
oil. China's rapid economic development has been a leading 
reason for the rising global demand for energy and raw natural 
resources.
    Steel prices, once low enough, just a few years ago, to 
lead the President to provide import relief for domestic 
companies, have increased considerably. We are trying to build 
a natural-gas pipeline up in Alaska. The Chinese demand for 
steel for construction purposes makes our project that much 
more expensive to pursue. And although we are an ocean apart, 
China's demand for raw resources is having an impact on the 
United States, and we need to approach this issue with our eyes 
wide open.
    When it comes to energy imports, Canada's importance to the 
United States is not widely recognized, but they are the United 
States' largest foreign supplier of energy, and China is 
investing heavily in Canada's oil sands, constructing a 
pipeline from Alberta to the West Coast to export that oil. 
Just as we often overlook the fact that Canada is our largest 
foreign source of energy, we also tend to believe that our 
northern neighbor will always be a secure energy source for the 
United States, not for other nations. Well, China has brought 
the competition for natural resources to our backyard.
    In taking the long-term look, I would be remiss not to 
mention education. Our current strengths will not have lasting 
power if the next generation is not able to continue and build 
upon our successes.
    I had hoped to have Mr. David Lampton, Dean of Faculty and 
Director of China Studies at SAIS and the Nixon Center, with us 
today, as well, but, unfortunately, scheduling conflicts did 
not allow that to occur. Mr. Lampton did provide the committee 
with written testimony for the record, and I would like to note 
that, in that testimony, Mr. Lampton points out that, in 2002, 
China and the U.S. graduated approximately equal numbers of 
graduate-level engineering degrees, but China graduated almost 
3.5 times as many undergraduate engineering degrees. He also 
notes that U.S. engineering schools have substantial 
enrollments of non-citizen students. The National Science 
Foundation predicts that by 2010 China could be turning out 
four times the number of engineering doctorates as the U.S.

    [The prepared statement of David M. Lampton follows:]

                Statement Submitted by David M. Lampton

    Madam chairman and committee members: You have asked me to address 
two profoundly important questions: ``What are the security, economic, 
and diplomatic implications of China's rise for America?'' And, ``What 
U.S. policies are appropriate in light of those implications?''
    China's rise has implications for:

   America's competitiveness: In the 1990s we seemed to have 
        the notion that ``globalization'' was something that we did to 
        others requiring them to reform. Americans have to get used to 
        the notion that globalization also requires us to reform.

   Asia's security structures: The post-World War II East Asian 
        security structure, the ``hub and spokes'' system, is 
        undergoing gradual and uneven change. U.S. allies are 
        rebalancing their interests with America against their 
        expanding interests ins and concerns about, a growing China.

   The United States' diplomatic toolbox and the mix of power: 
        There are three kinds of power--coercive, economic, and idea 
        power. It is tempting to become fixated with the military. 
        dimensions of China's rise, but it is the economic and 
        intellectual dimensions that likely will be most important. 
        China is leading with its growing economic and intellectual/
        cultural power in the region. America must rediscover and-
        utilize its own economic, cultural, and intellectual power 
        (soft power) assets in East Asia.

    China's rise need not be at America's expense, even though we must 
be prepared for downside possibilities. If China's rise can push 
America to make the internal and external policy and behavior 
adjustments we should make (out of consideration of our own interests), 
the United States will be stronger for this productive competition, 
East Asia will become more stable, and we will have a more prosperous 
and effective partner in addressing the region's humanitarian and 
developmental problems. Was China to move in less welcome directions 
and the United States to fail to make the needed changes, future 
prospects would be much more somber.

     UNCERTAINTIES AND THE DIMENSIONS OF CHINA'S GROWTH AND CHANGE

    The People's Republic of China (PRC) is the largest, most rapidly 
changing international actor on the world stage today. It is traversing 
enormous tracts of previously uncharted social, political, economic, 
and diplomatic real estate. Never before has such a large economy moved 
so rapidly from a planned structure toward market operation; opened up 
so speedily to the world financial and trade system; changed so 
dramatically from a rural to increasingly urban society; switched from 
energy self-sufficiency to import-dependence so quickly; and, gone from 
an information-starved to information-rich status so abruptly, the many 
controls on the Internet notwithstanding.\1\ Given the magnitude of 
these changes, it is impossible to anticipate all the conceivable 
outcomes. A lot could go wrong in China, not the least being a rigid 
political system crumbling under the accumulated forces unleashed by 
reforms. Simply projecting past trends and successes indefinitely into 
the future is risky, indeed destined to be wrong along some important 
dimensions. If nothing else, as China's economy enlarges and exhausts 
the relatively ``easy'' gains that have produced spectacular growth 
thus far, the rate of economic expansion can be expected to slow. The 
straight-line projection of Japan's spectacular economic performance of 
the 1980s into the indefinite future is a cautionary tale.
---------------------------------------------------------------------------
    \1\ Michael Chase and James Mulvenon, You've Got Dissent: Chinese 
Dissident Use of the Internet and Beijing's Counter Strategics (Santa 
Monica: RAND Corporation, 2002).
---------------------------------------------------------------------------
    Uncertainties aside, America must plan for a future in which China 
continues to make progress across a broad front. The dimensions of the 
PRC's emergence are everywhere apparent and the list below simply is 
suggestive:

   China's military modernization still faces enormous 
        challenges, but the progress to date has exceeded expectations 
        of a decade or so ago. We see this in China's space program, 
        its downsizing and professionalization of forces, its shift 
        toward naval, air, and missile capabilities, and in its 
        evolving force-use doctrines.

   The PRC's GDP growth has been in excess of 9 percent on 
        average since 1990, after having averaged above 10 percent in 
        the 1980s, according to the world Bank. India, by way of 
        contrast, had growth rates a little more than fifty percent of 
        China's throughout the 1980s and 1990s.\2\
---------------------------------------------------------------------------
    \2\ The World Bank, World Development Indicators (Washington, DC: 
The World Bank, 2004), pp. 182-183.

   China's imports and exports have grown eight times as fast 
        as world trade in the 1980-2003 period according to the IMF. In 
        1978, China's turnover trade accounted for .8 percent of world 
        trade; by last year it accounted for 6.4 percent. Cumulative 
        foreign direct investment in China has gone from negligible in 
        1982 to $500 billion (2003), taking off in the early 1990s. 
        There is a downside here for China, inasmuch as a large share 
        of PRC exports (55 percent in 2003) comes from foreign-invested 
        enterprises. This means that many of China's wholly owned-
        domestic firms still are far from competitive internationally, 
        though a few firms have emerged such as Huawei telecom and 
---------------------------------------------------------------------------
        Haier appliances.

   China also is becoming a growing supplier of capital, 
        particularly in Southeast Asia, as well as in the United 
        States, Latin America, and elsewhere. The PRC's foreign 
        exchange reserves (minus gold) were about $659.1 billion in 
        March 2005 and the PRC held $174.6 billion in U.S. Treasury 
        securities, second only to Japan ($715.2 billion) in October 
        2004.

   In 1993, of China's total exports, 17.7 percent were 
        machinery and electrical products; by 2003, 51.9 percent were 
        in this category. The U.S. Census Bureau reports that in 2002 
        for the first time the U.S. trade balance in advanced 
        technology products went negative, though we must acknowledge 
        what constitutes ``advanced'' products is a broad category that 
        includes items of comparatively modest technology.

   Since 2002, Japan, South Korea, and Taiwan have seen China 
        become their number one export destination, replacing the 
        United States, though this hides the fact that America remains 
        a primary destination for intermediate goods sent to China, 
        assembled there, and then exported.

   Intellectually, growing numbers of foreign students 
        throughout Asia are studying in China. And, China's own 
        students are achieving more internationally. In April of this 
        year, ``[T]he University of Illinois tied for 17th in the world 
        finals of the Association for Computing Machinery International 
        Collegiate Programming Contest.'' \3\ Shanghai Jiaotong 
        University took first place.
---------------------------------------------------------------------------
    \3\ Thomas L. Friedman, ``Soon, Just Showing Up Won't Even Take the 
Bronze,'' International Herald Tribune, May 14-15, 2005, p. 4.

   The OECD reports that Chinese R & D expenditures are growing 
        rapidly now, from a low base, and a Stimson Center study by 
        Kathleen Walsh\4\ reports on the growing number of foreign R & 
        D facilities locating in China.
---------------------------------------------------------------------------
    \4\ Kathleen Walsh, Foreign High-Tech R&D in China (Washington, DC: 
The Stimson Center, 2003).

    In short, America should plan on dealing with an increasingly 
capable China in the military, economic, intellectual, and cultural 
realms. The United States should not go into the defensive crouch of 
containment-like thinking. Instead, we must think seriously about how 
to cooperate and compete more effectively, and play a central role in 
the emergence of new patterns of economic, intellectual, and security 
interaction.

            THE BUILDING BLOCKS OF NATIONAL COMPETITIVENESS

    The PRC is becoming an increasingly able competitor on the global 
playing field America did so much to build. China wants to play ball 
with America. The question is: ``Will America perform well in a game 
and on a field it long dominated?''
    The building blocks of national power and competitiveness are 
national investment and savings; education; health; energy; and sound, 
legitimate governance. Though China has significant problems in each 
area, it is doing comparatively well in the first three--and less well 
in energy and legitimate governance.
    In 2003, the Chinese had an investment to GDP ratio between 32 
percent and 42 percent. Looking at domestic savings alone, the IMF says 
China's ``gross national savings'' rate that year was 47.6 percent. 
These rates make continued high economic growth very likely.
    Chinese performance contrasts sharply with America's. Harvard's 
Larry Summers was right when he said:

          In the last year [2003], the net savings rate of the United 
        States has been between 1 and 2 percent . . . It represents the 
        lowest net national savings rate in American history . . . In 
        fact, net investment has declined over the last four to five 
        years in the United States, suggesting that all of the 
        deterioration of the current account deficit can be attributed 
        to reduced savings and increased consumption rather than to 
        increased investment.

    The United States cannot long compete when it borrows for current 
consumption while China invests using its own savings. America must 
rebalance its saving, investment, and consumption priorities. If we do, 
Beijing's competition will have done us a big favor. Such action would 
help us resolve our twin budgetary and trade deficits.
    Examine the second building block--education. U.S. higher education 
is excellent. Nonetheless, considering its low current income levels, 
and the many severe education problems in China's rural areas, the PRC 
has brought primary school education to 93 percent of the nation's 
population; the percentage of secondary school-age children enrolled 
has risen rapidly in the last decade; and the percentage of China's 
population in tertiary education has more than quadrupled since 1991/
92. Many people say China is attracting foreign manufacturing 
investment because of cheap labor. In fact, the attraction is the 
combination of relatively inexpensive and relatively skilled labor, 
though we ought not to forget the millions of educationally deprived in 
rural areas.
    Take as an example a field that is highly germane to economic 
modernization--engineering. China and the United States in 2002 granted 
approximately equal numbers of graduate-level engineering degrees, 
though China granted almost 3.5 times as many undergraduate engineering 
degrees. Moreover, U.S. engineering schools have substantial 
enrollments of non-citizen students. More startling, entering class 
sizes in engineering schools in China are growing rapidly. Looking to 
the future, and even discounting for quality differences, China will 
have enormous and growing human resources in technology. The National 
Science Foundation predicts that by 2010 China could well be turning 
out about four times the number of engineering doctorates as the United 
States.\5\
---------------------------------------------------------------------------
    \5\ Data cited by Ernest Preeg, ``The Emerging Chinese Advanced 
Technology Superstate,'' presentation at The American Enterprise 
Institute, May 13, 2005.
---------------------------------------------------------------------------
    Go to most U.S. graduate schools in the hard sciences and you will 
see highly capable students from China in profusion. And, while the 
number of Americans studying in the PRC is in the low thousands each 
year, China for well over a decade has had about 60,000 students 
matriculated in American institutions of higher learning studying 
science, technology, as well as business, economics, and international 
affairs. China is turning out language proficient, culturally adept, 
and scientifically and technically capable people at home and abroad in 
ever-greater numbers. We must do the same thing. If Chinese competition 
motivates us to do what we should be doing, this is positive.
    Public health is a tricky third building block. There are millions 
of people in China with virtually no medical care, the system is 
vulnerable to infectious diseases as the world saw with SARS in 2002-
2003, and maladies once reduced to very low levels are increasing in 
incidence--not to mention a looming HIV/AIDS catastrophe. Nonetheless, 
China had a life expectancy in 2002 of 71 years, which compares 
favorably with the life expectancy in a much richer United States--77 
according to the World Bank. And yet, in 2002 China only consumed about 
5.5 percent of its still modest GNP on health expenditures while the 
United States consumed 13.3 percent by 2004, this figure had risen to 
15.4 percent and the rate projected for 2014 is a whopping 18.7 
percent. The point is not that Americans should prefer Chinese health 
care, but rather that if the United States is to remain competitive it 
must control health expenditures. Germany, France, and the UK each have 
longer life expectancy rates than the United States, and they have 
about half the per capita health costs of America according to OECD 
data. The U.S. Bureau of Economic Analysis reports that ``Before the 
first energy shock [1973], Americans, spent $1.56 on health care for 
every dollar they spent on energy . . . Now, even with oil prices up, 
every dollar spent on energy is matched by $3.81 on health care.'' \6\
---------------------------------------------------------------------------
    \6\ Floyd Norris, ``Compared with Health Costs, Energy is Cheap,'' 
International Herald Tribune, May 14-15, 2005, p. 12.
---------------------------------------------------------------------------
    And this brings us to energy policy, about which little need be 
said, other than the United States needs to get away from excessive 
reliance on imported petroleum and unstable regions of the world. 
Whatever nation first escapes the petroleum trap will achieve economic 
dominance for the next era; indeed, such liberation would define a new 
era. China is becoming rapidly energy-import dependent and this 
accounts for the near obsession Beijing has with securing sources of 
energy supply irrespective of the attributes of the supplying regimes. 
Energy is one of the . principal Achilles heels of the PRC--along with 
water.

       THE CHALLENGE OF BUILDING NEW SECURITY STRUCTURES IN ASIA

    Turning to the security implications of China's rise, the trends 
merit vigilance. China's official, non-inflation adjusted defense 
budget has increased in the double-digit range every year from 1990 
through 2004. Most outside estimates place China's military 
expenditures in a league with Russia, Japan, and the: UnitedSecond, 
China has an active, space program, the dimensions of which would 
surprise most Americans, and emphasis is on modernizing air, missile, 
and naval forces, as well as enhancing cyberspace, communication, 
guidance, and reconnaissance capabilities. Beijing is developing these 
forces and capabilities to have military options if it determines 
Taiwan is moving unalterably toward independence; to deter Washington 
from entering a Taiwan Strait conflict; to safeguard China's nuclear 
deterrent; and to secure its resource lifelines: There is a non-trivial 
chance that Washington and Beijing could end up in conflict in the 
Taiwan Strait if the situation there is not handled well. Since early 
this year, however, there have been positive developments in cross-
Strait relations--we must watch carefully and actively encourage 
positive moves.
    Beyond Taiwan, however, the U.S. security situation in Asia is 
changing less as a consequence of China's growing military power than 
its economic growth. America's post-World War II allies in East Asia 
(Japan, the Republic of Korea [ROK], Australia, Philippines, and 
Thailand) increasingly depend on exporting to China and/or receiving 
increasing investment from it. Consequently, most U.S. allies will not 
allow themselves to be drawn into what they view as unnecessary 
friction with Beijing. Japan is the ally most tightly aligned with 
Washington. As China's economic power grows, the United States can 
decreasingly count on allies marching in lockstep. In some cases, such 
as the ROK, that day already is gone. The amorous effects on U.S. 
allies of China's economic aphrodisiac are nowhere more apparent than 
in NATO's contemplating arms sales to China in the face of Washington's 
opposition.
    China's rise, therefore, is forcing many of our traditional allies 
in the region and farther afield increasingly to balance their 
interests with Beijing against their interests with Washington. Most 
Asian countries do not wish to be forced to choose between the two. As 
China becomes a bigger security and economic player, and if it 
continues with its trade and smile diplomacy, alliances that initially 
were directed against the PRC, and more recently designed to maintain 
balance and reassurance in the region, will become progressively less 
effective unless they adapt.
    Institutions need to be developed that incorporate China into the 
Asian structure of peace. America needs to take the lead in. developing 
this structure. The most critical strategic challenge in this respect 
is how to foster security cooperation between China, Japan, and the 
United States, a structure not premised on a ``two-against-one'' 
triangular logic that inevitably has one party feeling left out and 
vulnerable. No major regional challenge in Asia can be effectively 
addressed without cooperation among Beijing, Tokyo, and Washington. The 
recent surge in Japanese and Chinese nationalism and Chinese hostility 
directed at Tokyo signal the dangers.

   THE IMPLICATIONS FOR AMERICAN DIPLOMACY AND THE MIX OF POWER USED

    Presidents Bush and Hu Jintao both traveled to Australia in late 
2003 and it is widely asserted that China's president was more warmly 
received by our ally's legislature than our president, reflecting the 
success Beijing has had in its dollar and smile diplomacy, the most 
notable features of which were signing two energy deals with Canberra 
each of which ranged well over fifteen billion dollars. China also is 
seeking to reduce tensions in the region by shelving most territorial 
issues, signing agreements to reassure neighbors, promoting free-trade 
agreements, engaging in military-to-military exchanges, establishing 
large and long-term investment relationships, and promoting its ``early 
harvest initiative'' that promises some agricultural producers in the 
region more favorable access to China's domestic market. Beijing is 
doing the latter to win support on Taiwan as well. This tightly 
coordinated diplomatic and economic strategy in the region is leading 
serious analysts of the East and Southeast Asian system to talk about a 
``power shift,'' though Asia is by no means sinocentric.\7\
---------------------------------------------------------------------------
    \7\ See, for example, David Shambaugh, ed., Power Shift: China and 
Asia's New Dynamics (forthcoming, University of California Press, 
2005).
---------------------------------------------------------------------------
    The United States needs to react more effectively to these 
developments and possesses enormous resources to do so if it employs 
the appropriate mix of economic, intellectual and cultural, and 
military power. Washington has talked too much about military issues 
and done too little on the economic and cultural/educational fronts. 
This problem began under the Clinton administration when Washington 
reacted too feebly to the Asian Financial Crisis. Nonetheless, the 
United Staten still is more trusted to be an honest broker, and power 
balancer, than anyone else in the region. Moreover, Americais still the 
most important ``end market'' for most everyone in the region. 
Washington needs to be more active in multilateral diplomacy in the 
region and more active in expressing interest in multilateral free-
trade possibilities.
    China's integration into vital regional and global production 
chains has an important implication for the use of economic sanctions. 
For many Chinese exports the value added in the PRC is 30 percent or 
less, meaning that 70 or more percent of the value is added in other 
countries or regions, most of which are friendly to us. To inflict 
sanctions against nominally ``Chinese exports,'' therefore, is to 
inflict the bulk of the pain on others. This is bad economics and bad 
international politics.

               POLICY IMPLICATIONS FOR THE UNITED STATES

    Americans believe in competition; China's emergence is providing 
it. There are two categories of policy responses--those involving 
fundamental American domestic systems and those that more directly 
pertain to relations with China and East Asia.

  (1) China's rise forces Americans to reexamine fundamental systems in 
the United States, challenges we ought to address even if China were 
not in the picture. The issue is, ``Are we going to be competitive?'' 
If so, we need to:

          (A) Increase our national savings rate. The solutions to our 
        trade and budget deficits do not principally rest in Beijing, 
        they lie principally in Washington. It may be emotionally 
        satisfying to rail against foreigners, but this alone will not 
        be economically effective. Having said this, Beijing now should 
        modestly revalue the RMB out of its own, as well as U.S., 
        interests (more below).

          (B) Improve our schools--increase math and science training. 
        Bill Gates has noted our high schools are broken overall, and 
        one needs only look at foreign student enrollments in higher 
        education science and technology programs in the United States 
        to know that we are not producing sufficient numbers of our own 
        citizens proficient in the hard, mathematical, and engineering 
        sciences. As Gates put it in recent remarks:

          By obsolete, I do not just mean that our high schools are 
        broken, flawed, and under-funded--though a case could be made 
        for every one of those points. By obsolete, I mean that our 
        high schools even when they are working exactly as-designed--
        cannot teach our kids what they need to know today.\8\
---------------------------------------------------------------------------
    \8\ Bill Gates, ``Remarks to National Education Summit on High 
Schools,'' www.gatesfoundation.org (accessed May 15, 2005), remarks 
delivered February 26, 2005.

          (C) Get more of our students into first-rate language and 
        area studies programs and put the same emphasis on being 
        effective with other peoples that the Chinese do. Mainstream 
        social science departments in major U.S. research universities 
        have lost interest in area studies--this is a national security 
        issue and should be taken as seriously in the 21st century as 
---------------------------------------------------------------------------
        it was in the second half of the twentieth.

          (D) Find a way to stop the steady increase of health 
        expenditures as a percentage of GDP. The American auto 
        industry, for example, cannot be competitive when its overhead 
        includes $1,525 of health costs on each car rolling off the 
        assembly line as is the case at GM.\9\ And be assured, China is 
        emerging as an international competitor in this most American 
        of industries.
---------------------------------------------------------------------------
    \9\ Katie Merx, ``Widening Burden: GM Confirms that Cost of Health 
Care is a Crisis,'' Detroit Free Press, April 20, 2005.

          (E) Reduce U.S. dependence on external supplies of energy, 
        contain costs, and decrease negative environmental consequences 
---------------------------------------------------------------------------
        of energy use.

    These are alterations that the United States can and must make--
they do not particularly depend on Beijing's cooperation but will have 
great bearing on how effective we are in competing with the PRC. If we 
fail to do these things, even effectively pushing Beijing to alter its 
unhelpful practices (which we should do) will only marginally improve 
things.

  (2) With respect to regional/bilateral policies, many things should 
be done:

          (A) Because U.S. competitiveness relies on innovation, and 
        this depends on protecting intellectual property (IPR), my 
        first priority with respect to economic/trade policy is IPR 
        protection. I recently was in China with a group of your fellow 
        senators and representatives and had a hard time finding any 
        genuine foreign goods for sale by small vendors. I note that in 
        recent congressional testimony Charles W. Freeman III, 
        Assistant USTR, said that: ``The administration places the 
        highest priority on stemming the tide of intellectual property 
        rights infringement in China.'' \10\ I agree.
---------------------------------------------------------------------------
    \10\ Charles W. Freeman III; ``Testimony Before the Committee on 
Government Reform,'' May 13, 2005.

          (B) With respect to RMB valuation and exchange rate issues, 
        we must distinguish between a flexible exchange rate system and 
        a one-time revaluation. The former should be our longer-term 
        goal, but a modest upward revaluation of the RMB now is 
        warranted. This would assist the global monetary system in 
        appropriately realigning exchange rates and help Beijing manage 
        its current inflationary pressures. However, I doubt that any 
        feasible (likely) Chinese revaluation would have great impact 
        on the bilateral trade deficit and pushing precipitously for a 
        fully market-driven exchange rate is risky given China's 
---------------------------------------------------------------------------
        problem-plagued banking sector.

          (C) Washington should develop a means by which the United 
        States, China, and Japan regularly consult about security 
        concerns. The idea is to have, ``three-two talks'' once or 
        twice annually. These would be discussions where cabinet or 
        higher-level security and diplomatic officers of the three 
        governments get together to exchange views on common concerns. 
        Such talks might evolve into something more formal, though we 
        have the problem that Beijing may view such interactions as two 
        against one as long as Washington has a bilateral alliance with 
        Tokyo that it feels is directed against China. With respect to 
        Northeast Asia, there were hopes that the Six-Party Talks might 
        evolve into a more formal security structure. Those prospects 
        seem dim now, but there is a role for five of those six parties 
        to consult about regional security issues and perhaps something 
        more formal could emerge. The main point is that bilateral 
        alliances, with the Cold War patina of being aimed at China, 
        are going to be decreasingly effective as Beijing's power and 
        attractiveness increase, assuming those trends persist. We must 
        bring China into the regional security architecture.

          (D) America needs to rediscover its soft power in the region. 
        Washington should become more active in multilateral regional 
        free trade discussions, talk about a broader range of issues 
        than the global war on terror, and most immediately fix visa, 
        exchange, and related policies so that businesspersons and 
        students from the region have traditional access to America. 
        The late-1999 move of the public diplomacy function from the 
        stand-alone United States Information Agency to--the Department 
        of State was not wise inasmuch as public diplomacy suffered a 
        relative decline in priority given the State Department's other 
        responsibilities. We should increase the effectiveness and 
        credibility of public diplomacy and restore America as a place 
        people can expeditiously enter for education and business. The 
        2.4 percent decline in international student enrollments of 
        2003/4 is not in the national interest.

          (E) And finally, China's rise has daunting implications for 
        Taiwan. Taiwan has bet its economic future on financial, trade, 
        and manufacturing integration with the PRC, but there are 
        significant forces on the island that desire independence, a 
        quest that basically is incompatible with the island's security 
        and economic needs. To maintain this fundamentally inconsistent 
        policy, Taipei will require increasing levels of security 
        commitment from Washington, the cost of which will grow as 
        Beijing's power increases. The security of a Taiwan that is 
        highly integrated into the PRC's economy cannot be maintained 
        by military means alone. Therefore, recent trends toward cross-
        Strait economic cooperation, cultural exchange, and political 
        dialogue are logical, desirable, and to be encouraged. Getting 
        back to a situation of cross-Strait dialogue that proved 
        productive from 1992 until later in the 1990s should be a 
        priority U.S. goal. For, if the Taiwan Strait were to erupt 
        into conflict, our hopes for a pacific, Pacific region would be 
        grievously set back.

    Senator Murkowski.  Since the attacks of September 11, many 
foreign students have found it more difficult to get a visa to 
study in the United States, so with substantial non-citizens in 
our engineering schools and fewer foreign students entering the 
U.S., keeping the U.S. competitive in the world marketplace is 
more than just about tariffs and foreign policy; it is also 
about developing future generations of Americans to be 
competitive with their foreign counterparts.
    In taking stock of all these issues, what we must not do is 
act in such haste that we act irresponsibly. We must keep in 
mind the lessons of the December tsunami. The United States' 
rapid humanitarian response and use of our military assets in 
the region generated a considerable amount of goodwill. Locals 
took note that despite China's increasing investment and 
activities in their countries, when disaster struck, the U.S. 
was the only country able to actually provide the muscle behind 
the response. It is a reminder, albeit not the way you want a 
reminder to happen, that even as we are looking at China's 
rapid expansion, they do not yet have the ability to be a 
superpower. They are well on their way, but they are not there 
yet.
    The United States still holds plenty of cards in our hand. 
How we play those cards, however, will determine our future 
involvement in Asia. I do look forward to hearing from each of 
our witnesses as to your suggestions on how the United States 
should move forward, what policy changes need to occur, and 
what role we, in the Congress, can play in the process.
    I would like to recognize my colleague, Senator Obama, and 
ask if you would care to enter any opening comments. And thank 
you for joining us this afternoon.

                STATEMENT OF HON. BARACK OBAMA,
                   U.S. SENATOR FROM ILLINOIS

    Senator Obama.  Absolutely. Thank you very much, Madam 
Chairwoman.
    I appreciate, Mr. Hill, you taking the time to be here. 
Thank you so much. Because I am sure that everybody's time is 
limited, I will just keep my remarks brief.
    Obviously, part of what prompted this hearing this 
afternoon is the concern about ongoing economic relationships 
between China and the United States. I will be interested in 
hearing some of your perspectives, in terms of potential 
competition--hopefully, friendly competition--between the two 
nations when it comes to energy policy and how we are having an 
impact on trade agreements, not only in Asia, but also in 
places like Latin America. I am, obviously, curious, also, 
given just some of the recent reports coming out, about China's 
relationship with North Korea. I probably will, maybe, pose 
just a couple of brief questions, since that is obviously on 
our minds in the news.
    Thank you.
    Senator Murkowski.  Thank you.
    And right on time, Senator Feingold, would you care to give 
any opening comments this afternoon?
    Senator Feingold.  No, thank you. And I look forward to the 
question period.
    Senator Murkowski.  You bet. Great.
    With that, Mr. Hill, if you could please share your 
comments with us? And, again, welcome.

  STATEMENT OF CHRISTOPHER HILL, ASSISTANT SECRETARY FOR EAST 
           ASIA AND THE PACIFIC, DEPARTMENT OF STATE

    Ambassador Hill. Thank you very much, Madam Chairwoman.
    I have a report, a statement, that I would like to enter in 
the record, and then read a short excerpt from it, and then go 
right to your questions.
    Senator Murkowski.  Your entire comments will be included 
in the record.
    Ambassador Hill. Thank you very much.
    Madam Chairwoman, Members of the Subcommittee on East Asia 
and Pacific Affairs, I am pleased to appear before you this 
afternoon to discuss China's emergence in the Asia-Pacific 
region and the challenge and opportunity this presents the 
United States and its allies and friends in the future.
    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 integrate into the international 
system. As the Secretary of State said on a March 19th 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.
    How China changes depends mostly on its own people, but how 
we and others interact with it will shape the environment in 
which China makes its choices. Our policy will be based on a 
realistic appraisal of our common interests and our 
differences. Our continued active engagement in the Asia 
Pacific region and around the world is vital. I can assure you 
that America is working hard today on all of its trans-pacific 
relations. The future of the Asia Pacific will depend on a 
strong and committed America.
    The President said, on May 30, that our relationship with 
China is complex. In recent years, we have worked hard to 
address common challenges--regional and global and economic and 
political--with China. We do have differences with China on 
many important issues--human rights, nonproliferation, Taiwan, 
and, most prominently in the press recently, intellectual 
property rights, textiles, and currency. We have to handle 
these issues sensitively, but in ways that advance our values 
and our national interests.
    We discern two major trends in China's emergence in the 
Asia-Pacific region. First and foremost is the development of a 
robust trade and investment relationship which fuels China's 
own domestic development. Second, China is clearly interested 
in matching its economic power with political influence and, 
thereby, giving it an opportunity to help shape the region and 
its own interests.
    A brief look at China's trade and investment with Asia, on 
which I have provided more details in my prepared statement, 
illustrates why the PRC is already, rather than becoming, a 
major regional player. China's trade with ASEAN grew over 30 
percent last year. In North Asia, China is now the leading 
trade partner of both Japan and Korea. China also recently 
became one of the largest investors in Indonesia, buying oil 
and gas interests.
    Nonetheless, U.S. trade and investment in the region 
remains robust, and is distinct from what China has to offer. 
China exports primarily consumer goods that, for the most part, 
do not compete directly with U.S. products like high-tech 
knowledge-based goods, services, and agricultural products. The 
U.S. has invested over $85 billion in ASEAN; whereas, Chinese 
investments are less than two billion. And Asia needs and 
values our markets and our expertise for its own continued 
development.
    China's size and growing economic links in the region 
ensure that its influence will grow in the years to come. But, 
as I said earlier, America's role in Asia has increased, not 
diminished, through our strong alliance with Japan, Australia, 
South Korea, Thailand, and the Philippines; thoughtful changes 
in our global force posture; extensive engagement in regional 
architecture, such as the ASEAN Regional Forum and the Asia 
Pacific Economic Cooperation Organization; and our own open and 
transparent markets.
    Let me comment briefly on the impact of China's 
relationships with Taiwan, North Korea, and Japan on regional 
security issues.
    In Taiwan, the anti-secession law, which China passed last 
March, including a statement that it would not renounce the use 
of non-peaceful means in its policy toward Taiwan, was 
unhelpful and, in our view, a step back from the kind of 
dialogue that would lead to a peaceful resolution of 
differences. The longstanding U.S. position based on our one-
China policy and commitments under the joint communiques and 
the Taiwan Relations Act, has been that cross-Strait 
differences must be resolved in a way that is acceptable to the 
people on both sides of the Strait. To that end, the United 
States Government strongly encourages cross-Strait dialogue of 
all forms. While Taiwan's opposition parties' leaders' recent 
trips to Beijing have the potential to be helpful, it is 
crucial, really, that China take the important next step of 
reaching out to duly elected representatives on Taiwan.
    In North Korea, China has been very supportive of the six-
party process in its role as host of the talks. China has made 
clear, at the highest levels, that it shares our goal of a 
Korean Peninsula free of nuclear weapons. China has the closest 
relationship with North Korea of any of the six parties, and it 
is for this reason that we continue to believe that the Chinese 
leadership has the kind of leverage that can help make a non-
nuclear Korean Peninsula a reality. It is incumbent on each of 
the parties, particularly China, to make very clear to North 
Korea that the time has come for it to return to the talks in a 
way that demonstrates that it is ready to make a strategic 
choice about its future.
    In Japan--America has few stronger allies in the world than 
Japan; and, throughout this administration, we have worked hard 
to develop common approaches to global and regional problems. 
Thus, the unresolved tensions between China and Japan, 
exacerbated by diverging political and historical perspectives 
and differing military and economic priorities, disrupt a 
relationship of great importance to the region. Healthy China/
Japan relations are essential to stability and prosperity in 
East Asia.
    I will conclude with two observations. First, China's 
global emergence is a natural consequence of its economic 
growth and development, and need not occur at the expense of 
the United States. We are, as I said--and we will remain--a 
Pacific power by virtue of our shared values, economic ties, 
and defense relationships with many of the countries in the 
region. I assure you that a strong, secure United States and a 
strong, secure, prosperous, and stable Asia Pacific remain our 
goal, and a continuing reality.
    Second, we must work with China, and with all our partners, 
to ensure that its emergence takes place within strong regional 
and global security, economic, and political arrangements. I 
believe that this will be one of the key objectives of our new 
China/U.S. dialogue to be held soon to be led, on our side, by 
Deputy Secretary Bob Zoellick.
    With that, Madam Chairman, I would be pleased to take any 
and all of your questions.
    Thank you very much.

    [The prepared statement of Ambassador Hill follows:]

               Prepared Statement of Christopher R. Hill

    Madame Chairman, members of the Subcommittee on East Asian and 
Pacific Affairs, I am pleased to appear before you this afternoon to 
discuss a topic that has engaged policymakers, legislators, academics 
and citizens alike for the past quarter of a century--China's growing 
influence in Asia. Dealing with China's emergence--its economic and 
political development, its engagement in a rules-based international 
world, its evolution as a major military presence in the region--will 
be a key challenge and an important opportunity for the United States 
and its allies and friends and over the next quarter of a century and 
beyond.

             GETTING OUR RELATIONSHIP WITH CHINA ``RIGHT''

    For three decades, seven administrations have sought to integrate 
China and its people into the international system. We have succeeded 
in developing a bipartisan policy that has met with considerable 
success since 1972. Today's challenge is different from thirty years 
ago: the key question is how a more integrated and powerful China uses 
its growing influence and whether it will do so in concert with the 
United States and its allies. Will it accept the challenge of the 
international community to help enhance the peace, prosperity and 
stability of the region and in doing so, positively change the 
international system as we know it today. As Secretary of State Rice 
said in a March 19 speech in Tokyo, the U.S. ``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. How China 
changes depends mostly on the people of China, but how others and we 
interact with it will have an impact on the environment in which China 
makes its choices.
    To further integrate China into regional and global security, 
economic, and political arrangements will require us to maintain active 
U.S. engagement in the Asia-Pacific region and around the world. 
Remaining a steadfast partner to our allies and friends in the region 
is a fundamental tenet of American foreign policy.
    Getting our relationship with China ``right'' is vitally important. 
A decade ago, we all wanted China to be more actively involved in 
regional and global affairs. We wanted China to engage with Taiwan in a 
dialogue that would lead to the peaceful resolution of outstanding 
differences acceptable to the people on both sides of the Strait. And 
we wanted it to open its market of 1.3 billion people to U.S. goods and 
services.
    We have achieved much of what we asked for on the latter: China is 
a member of the World Trade Organization, it is the world's third 
largest trader after the U.S. and Germany, and it is investing around 
the globe in Asia, Africa and the Western Hemisphere. Among our tasks 
now--and one we share with our allies and friends--is to ensure that in 
its search for resources and commodities to gird its economic 
machinery, China does not underwrite the continuation of regimes that 
pursue policies seeking to undermine rather than sustain the security 
and stability of the international community. We also want to ensure 
that China joins our efforts in the WTO to lower barriers to world 
trade; in short, that it cooperates across-the-board with the United 
States in ways appropriate to the first new great power of the 21st 
century.

                  U.S.-CHINA TIES NOT A ZERO-SUM GAME

    China's success in extending its political influence in the Asia-
Pacific region and throughout the developing world is, in my view, a 
logical evolution, closely tied to its emerging economic clout, and 
certainly is not a zero-sum game for the United States. Nor should 
China see our continuing pursuit of U.S. national and security 
interests in the region as a threat or a loss to them. I believe that 
China well understands that we are an Asia-Pacific power and that other 
members of the Asia-Pacific community--and here I would say China 
included--look to the U.S. market, U.S. investment, U.S. technical 
expertise, and to our open and vibrant society. And for the sixty years 
since the end of World War II, the Asia-Pacific community has looked to 
U.S. military forces in the region as a guarantor of peace and 
stability.
    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, non-proliferation, Taiwan, and some 
aspects of trade and finance, among others. We seek to ensure that our 
differences do not preclude cooperation in areas where we agree. All of 
these issues must be handled sensitively, but in ways that advance our 
values and national interests. Let me say again that we intend for our 
relationship with China to be based on a realistic appraisal of our 
common interests and the exploration of differences through dialogue.

             THE ECONOMIC DIMENSION OF U.S.-CHINA RELATIONS

    Let me turn to the economic side of China's emergence and 
especially how that affects the United States. China's WTO accession in 
2001 was a remarkable event. Its implementation of its commitments has 
created many opportunities for U.S. firms and exporters. U.S. exports 
to China have grown by 80 percent since accession, while total global 
U.S. exports grew just 11 percent during that same time. Nonetheless, 
serious problems abound in a variety of areas, from ineffective 
enforcement of intellectual property rights and barriers to 
distribution of products, to non-tariff barriers in agriculture 
(including a ban on U.S. beef) and a dramatic surge in textiles with 
the termination of the quantitative restrictions allowed by the WTO 
Agreement on Textiles and Clothing.
    We expect China to fully and effectively implement all of its WTO 
commitments and to take action on key trade and economic concerns to 
further open its market and eliminate distortions. We are determined to 
see change and have made that clear to the highest levels of the 
Chinese government. A number of these issues will be discussed at the 
Joint Commission on Commerce and Trade this summer. At the same time, 
extreme protectionism is not the answer. We need to find solutions that 
do not derail our broad, long-term commitment to free and fair trade. I 
believe the countries of the Asia-Pacific region share many of these 
same concerns about maintaining open markets and insisting on fair, 
rules-based trade.
    Protection and enforcement of intellectual property rights (IPR) in 
particular remains a vexing problem and a top priority our trade 
relationship with China. If China does not provide effective 
enforcement of IPR, it will undermine the development of knowledge 
industries and innovation around the world. Piracy and counterfeiting 
in China are rampant. If we can make it, they can fake it. The items 
being pirated and counterfeited range far beyond DVDs and other 
creative media. They include automobile brakes, even entire passenger 
cars, electrical switches, medicines, marine pumps, processed foods and 
other items that create health and safety risks in China and abroad 
because of poor product quality regulation. The scope and magnitude of 
the problem is huge and increasing--some American firms experience 
wholesale theft of product lines. Premier Wen Jiabao, Vice Premier Wu 
Yi, and others have spoken of the importance of IPR to an advancing 
economy and of the need to enforce IPR more actively. Yet, piracy and 
counterfeiting rates are as high as ever. We need to see a substantial 
reduction in IPR infringement in China; that is the real measure.
    As a result of USTR's Special 301 determination and out-of-cycle 
review of China's IPR regime, we are taking a number of actions, 
including considering using WTO procedures to ensure China's compliance 
with its obligations, invoking transparency provisions within the WTO 
to request that China produce detailed information about its 
enforcement activities, and using the JCCT to secure new, specific 
commitments to significantly improve IPR protection and the enforcement 
environment in China.
    We are also urging China to take a responsible role with regard to 
its exchange rate policy. As Treasury Secretary Snow noted in his most 
recent report, China's current exchange rate policy is ``highly 
distortionary,'' and poses risks to the Chinese economy and global 
economic growth. The Chinese leadership has committed to adopting a 
more flexible, market-oriented exchange rate regime; we believe the 
time is right for them to do so.
    China's leaders say they do not want economic and trade frictions 
to spill over into other aspects of our growing relationship. That will 
only be the case if we hold firm to our insistence on China's 
fulfilling the obligations it took on when it joined the WTO and the 
commitments it has made in bilateral and multilateral discussions since 
then.

                       CHINA IN THE ASIA-PACIFIC

    There are two main drivers behind China's emergence in Asia: a 
dynamic view of how trade and investment fuels its own domestic 
development; and a desire to match its growing economic weight with 
political influence to allow China to help shape the regional system to 
its advantage, where possible.
Trade and Investment
    The ability to bring economic growth and prosperity to its citizens 
is a key function that defines the legitimacy of any government; in 
recent years, as China has gone from a strict command economy to one in 
which market forces have played an increasing role, China's leadership 
has been successful in reducing poverty and delivering a better way of 
life for the majority of its citizens. The economy has grown an 
astounding 9 percent per year for the past 25 years; of course, this 
growth is coming from a very low base. China's economic orientation 
remains largely domestic--focusing on domestic investment, 
infrastructure development, and renewal--as the country tries to create 
the equivalent of 2 million new jobs a month for a growing workforce. 
However, a significant part of China's economic growth now depends on 
its outreach to the Asia-Pacific region and to the rest of the world to 
secure inputs, especially raw materials and commodities and energy, and 
markets. This growth has inevitably meant increasing global engagement 
and expansion of China's national interests.
    At this point, China's growing demand for resource inputs has 
contributed to sometimes significant price increases on world markets, 
but does not appear to have distorted international markets and caused 
physical shortages or debilitating price spikes, and China is working 
with international bodies such as the International Energy Agency on 
management best practices. The biggest impact on U.S. national 
interests is China's willingness to invest in and trade with problem 
states (Iran, Sudan, Burma). We are concerned that China's needs for 
energy and other resources could make China an obstacle to U.S. and 
international efforts to enforce norms of acceptable behavior and 
encourage China's participation in international organizations to 
counter this tendency.
    China's most dramatic diplomatic, political and economic gains of 
the past few years have been in Southeast Asia. Two years ago China 
signed the ASEAN Treaty of Amity and Cooperation and last year it took 
steps to complete the China-ASEAN Free Trade Agreement. Following an 
initial lackluster response to the tragic tsunami in South and 
Southeast Asia last December, China, like the United States, gained a 
large measure of regional goodwill by offering considerable government 
and public aid, and providing medical teams to help in hospitals and 
displaced persons camps.
    China has become one of the largest traders and investors with many 
Asian countries. Trade with ASEAN nations grew over 30 percent and 
surpassed $100 billion dollars in 2004. China became South Korea's top 
trading partner in 2004: their two-way trade China grew nearly 40 
percent last year to US$ 79 billion. China also became Japan's largest 
merchandise trading partner last year, with total two-way trade 
reaching US$ 214 billion.
    Nonetheless, U.S. trade with these and other Asian nations remains 
robust. U.S.-ASEAN trade tops $136 billion; U.S. two-way trade with 
Korea totaled US$ 72 billion; and our two-way trade with Japan reached 
$183 billion in 2004. U.S. trade and investment in the region is also 
qualitatively different from what China has to offer. Our comparative 
advantage remains in high-tech, research and development laden, goods, 
services and agricultural products. China exports primarily consumer 
goods that, for the most part, do not compete directly with U.S. 
products.
    China is not just trading; it is also investing in the region. 
China recently became one of the largest investors in Indonesia, buying 
into oil and gas interests. China's investment in Indonesia's energy 
sector now exceeds US$ 1.2 billion. And China is the largest foreign 
investor in some of the smaller economies in Southeast Asia; for 
example, China has recently become Cambodia's largest investor. Even 
so, China's outward investment pales in comparison with that of the 
U.S. China's cumulative realized investments overseas totaled 
approximately US$ 37 billion for all countries at the end of 2004; U.S. 
direct investment abroad stands at over US$ 2 trillion. In ASEAN 
countries, the U.S. has invested over US$ 85 billion; Chinese 
investment does not yet reach US$ 2 billion.
    China's approach to its Asian neighbors reflects recognition of its 
strategic considerations. By proposing to negotiate a free trade 
agreement with the ASEAN countries, China offered to share the benefits 
of its economic growth--while reminding the region of its growing 
reliance on China. We welcome China's willingness to expand the 
benefits of growth to others.
    At the same time, the United States is working to strengthen its 
trade and investment ties with the region. In October, 2002, the 
President announced the Enterprise for ASEAN Initiative, which offers 
the prospect of Free Trade Agreements to ASEAN countries that are 
committed to reform and liberalization. Under this initiative, we have 
already completed an FTA with Singapore, are negotiating an FTA with 
Thailand, and have strengthened our trade ties with ASEAN countries 
like Malaysia, Brunei and Vietnam. We are also working together within 
APEC to bring down barriers to trade and investment throughout the 
region.

Political Influence
    China also uses its growing trade and investment ties to achieve 
its political ends, which include continuing to isolate Taiwan. China's 
size and expanding economic integration ensure that its already 
significant role in East Asian security calculations will become larger 
in the years to come. China is a nuclear power with a large standing 
army and has become more of a ``status quo'' player in Asia. Its 
economic modernization increases its economic impact and enhances its 
political influence. Its military modernization aims at greater 
professionalism, upgraded aerial, naval and missile capabilities, 
enhanced command and control functions, and a rapid-deployment 
conventional force.
    However, China's growing security and military relationships with 
traditional U.S. Asian allies should not suggest that somehow U.S. 
influence or capabilities in the region have been diminished. U.S. 
policy toward Asia is anchored in our strong and enduring alliances 
with Japan, Australia, South Korea, Thailand, and the Philippines, 
which continue to provide unprecedented stability and prosperity in the 
region, and is reinforced by friendships with others in the region. Our 
allies throughout the Asia-Pacific region believe good U.S.-China 
relations are important to regional peace, prosperity and stability. 
Our efforts to work with China in key regional groups like the ASEAN 
Regional Forum and the Asia Pacific Economic Cooperation organization 
will enhance, not impair, our regional alliances, which are the primary 
guarantors of security in Asia.
    China's relationships with Taiwan, North Korea, and Japan deserve 
mention here.
    The PRC strategy on Taiwan is based on a refusal to renounce the 
use of force while simultaneously encouraging economic integration by 
making itself attractive to Taiwan investors. China also seeks to 
leverage its economic influence with countries of the Asia-Pacific 
region and beyond to generate support for the PRC's stand on Taiwan. We 
saw this recently when a number of countries like Burma, Cambodia and 
Laos issued statements in March welcoming China's unhelpful Anti-
secession Law.
    The longstanding U.S. position, based on our one-China policy and 
commitments under the joint communiques and the Taiwan Relations Act, 
has been that cross-Strait differences must be resolved peacefully 
through dialogue in a manner that meets the aspirations of people on 
both sides of the Strait. To that end, the USG strongly encourages 
cross-Strait dialogue of all forms. The anti-secession legislation 
adopted by China's National People's Congress was an unfortunate and 
unhelpful step that did not contribute to cross-Strait stability. Under 
Secretary Burns testified before this Committee on the actions the U.S. 
government took to dissuade China from pursuing the legislation and 
register our disappointment upon its passage. Since then, China has 
reached out to opposition figures on Taiwan, culminating in the 
historic visits to Beijing by leaders of the Kuomintang (KMT) and 
People First Party (PFP). We encourage any form of cross-Strait 
dialogue and believe that the unofficial KMT and PFP visits have the 
potential to serve as an important first step in the resumption of a 
dialogue between Beijing and Taipei. It is crucial, however, that China 
take the important next step of reaching out to elected representatives 
on Taiwan. We believe that recently stated positions on both sides of 
the Strait incorporate elements of flexibility that could form the 
basis of substantive dialogue.
    For the most part, China's political goals need not be viewed as 
antithetical to our own. China has been very supportive of the Six-
Party process in its role as host of the talks. China has made clear on 
numerous occasions at the highest levels that it shares our goal of a 
Korean Peninsula free of nuclear weapons. Our main problem is a North 
Korea that has boycotted the Six-Party process for almost a year. China 
has the closest relationship with North Korea of any of the Six Parties 
and it is for this reason that we continue to engage the Chinese 
leadership on the North's lack of willingness to make a non-nuclear 
Korean Peninsula a reality. It is incumbent on each of the Parties, 
particularly China, to make very clear to North Korea that the time has 
come for it to return to the talks in a way that demonstrates that it 
is ready to make a strategic choice about its programs.
    Unresolved tensions between China and Japan reemerge from time to 
time, causing disruptions in the development of a relationship that is 
of great importance to the region. As we witnessed recently, grievances 
about Japan's wartime legacy periodically erupt in China, most recently 
over changes to Japanese history textbooks that led to anti-Japanese 
violence. While Japan and China are more integrated than ever on the 
trade front, recent controversies over the Senkaku Islands, East China 
Sea energy exploration, China's posture toward Taiwan, and China's 
public opposition to Japan's bid for a permanent seat on the UN 
Security Council have chilled the relationship. The recent violent 
demonstrations in China against Japanese diplomatic and business 
facilities only serve to prolong ill will among neighbors. Disputes 
should be resolved through peaceful dialogue and discussion.
    Healthy China-Japan relations are essential to stability and 
prosperity in East Asia. The two nations have many common interests, 
and we encourage stable relations between them and engagement on a full 
range of issues. Recent senior government discussions between them were 
useful, but regrettably, a much-anticipated meeting between Prime 
Minister Koizumi and Vice Premier Wu Yi did not take place. We support 
high-level dialogue between the two countries to work through all 
concerns.

                        SOME FINAL OBSERVATIONS

    Let me conclude with a couple of observations.
    First, China's global emergence is a natural consequence of 
economic growth and development.
    Second, we must work with China, and with our partners around the 
world, to ensure that its emergence takes place within strong regional 
and global security, economic and political arrangements and I believe 
that this will be one of the key objectives of the new U.S.--China 
dialogue to be led by our Deputy, Bob Zoellick.
    Finally, we must guard against actions that threaten to disrupt our 
economic and security interests. I assure you that a strong, secure 
United States and a strong, secure, prosperous and stable Asia-Pacific 
remain our goal, and a continuing reality.

    Senator Murkowski.  Thank you, Mr. Hill. And I would also 
like to welcome to the committee Senator Voinovich. Did you 
have any comments that you wanted to make prior to going to the 
question round?
    Senator Voinovich.  No, I will just wait--Madam Chairman, I 
will wait until the question round.
    Senator Murkowski.  Great. Well, with that, we will go 
ahead and begin.
    I want to touch on North Korea first, because that is 
something that is certainly on all of our minds. And in your 
former position, I know you spent a great deal of your life 
just focusing on this issue. As we recognize the economic ties 
now between China and North Korea, does this increasing 
investment, capital investment, just--again, that economic 
relationship--does it help or hinder the Six-Party talks, and 
how the U.S.'s strategy may be changed to reflect the reality 
of this economic relationship?
    Ambassador Hill. First of all, we have seen the reports 
about the increase in the volume of trade. I would say, 
however, that, in terms of the volume of trade, this is not a 
major calculation for the Chinese. That is, when they look at 
the six-party process, they look at the need to get a nuclear-
free Korean Peninsula. They also understand--and I can assure 
you they understand at this point--the absolute importance that 
we attach to this issue. Whenever we talk to the Chinese, we 
talk about the North Korean problem. And we are absolutely 
committed to working with China to try to deal with this.
    So, to be sure, there has been a growth in trade. I am 
always skeptical of some of the numbers, because it is very 
difficult to tell. Some of the growth in trade has to do with 
the decline in various services in North Korea. We have an 
economy there that is truly in decline. Some of the trade 
represents privatized trade, growing cross-border trade, people 
carrying goods on their shoulders across the Yalu River. It is 
really hard to say to what extent there is this trade. 
Certainly, China is North Korea's major trading partner. 
Certainly, North Korea depends on China every single day for 
fuel and food. So, certainly China has a big influence in North 
Korea. But I believe--I firmly believe, on the basis of dealing 
with the Chinese--that they understand the absolute importance 
of solving the problem of nuclear weapons on the Korean 
Peninsula.
    Senator Murkowski.  Well, in recognizing that, the degree 
of influence that China acknowledges that they have over North 
Korea, there have been some that have suggested that China is 
not using that influence to the extent necessary, or needed, to 
move forward on the Six-Party Talks, and has been hesitant to 
do so. Can you speak to that?
    Ambassador Hill. Well, certainly we have asked the Chinese 
to do more to get North Korea--not only to the talks, because 
the exercise is not just getting them to the talks; it is 
getting them to the talks with a willingness to give up, 
permanently, their nuclear program--so, certainly we have 
looked to the Chinese to do more. We expect more, because, one, 
they are the host of the talks, and the talks are in Beijing, 
and, secondly, it seems that China needs to use some of its 
leverage. Now, we have not told it how to use its leverage, 
whether it uses its political leverage, whether it makes an 
important decision to use its economic leverage. But certainly 
the Chinese have a lot of influence, and we are encouraging 
them to use as much influence as they need to use to get North 
Korea, one, to the talks, and, two, to the talks in a 
willingness to give up these nuclear programs.
    Senator Murkowski.  Let us shift over to Japan. You make 
reference to the unresolved tensions and the fact that this 
has, certainly, the possibility of disrupting this 
relationship. How has the tension between China and Japan 
impacted the rest of the region? And what, in terms of the 
United States' role in attempting to defuse the tension, is 
happening now?
    Ambassador Hill. Well, let me make one point, with respect 
to the tension between China and Japan, on the Six-Party Talks. 
That is, I am satisfied that our cooperation with the six-party 
process continues, and that Japan and China are able to work 
together on that common enterprise. Both countries have made 
very clear they want to see a solution to this.
    But certainly the tensions between China and Japan are in 
no one's interests. It is not something we like to see. And, I 
would argue, when you look at the extent of the economic 
relationship between China and Japan, which is truly enormous, 
that this is not in either of their interests, as well. So, we 
are hopeful that they can resolve these issues.
    You know, these are tough issues, and they do go back into 
history. And history can be, obviously, a very powerful force, 
and a very powerful memory for people. So, I do not mean to 
make light of any of the historical issues here, but they do 
need to address them, and they do need to move on.
    I would make one other point, which is that when you 
compare how history has been dealt with in Asia, versus how 
history has been dealt with in Europe, you see that the 
Europeans have been able to get some things done in that 
regard, and move on in a way that--I think, those of us 
concerned about the situation in Asia, we need to do what we 
can to see if we can make some progress there, as well.
    Senator Murkowski.  Now, China has come out opposed to 
Japan's proposal to increase the U.N. Security Council by ten 
members. And instead of permanent members, they would like to 
see only non-permanent members. Do you see any scenario where 
China would accept another Asian nation as a permanent member 
of the Security Council?
    Ambassador Hill. Well, I think the issue of increasing the 
size of the Security Council is related to the overall issue of 
reform of the U.N. and reform of the Security Council. So, I 
certainly would not be in a position to say what the Chinese 
will or will not accept in the future in whatever format, 
except to say that I think the Chinese have a great interest in 
making the U.N. work, making the Security Council work. So, I 
would not try to rule out that they would include another Asian 
member, but I cannot speak for what they would do in the 
future.
    Senator Murkowski.  Sure. Just for members' information, I 
arbitrarily said seven-minute rounds, just to give everybody a 
first crack at things.
    But before I move on to Senator Obama, just a question to 
you about the comments that Secretary Rumsfeld had made in 
Singapore regarding China's military buildup being a threat to 
Asian security. Do you think that the rise of China is a 
stabilizing or a destabilizing force there in the region?
    Ambassador Hill. Well, I think the rise of China is a fact, 
and it is a fact that we are going to have to live with and 
work with, and, in a certain respect, try to shape. Now, we 
have areas where we are cooperating with the Chinese very well; 
and, frankly, I would include the six-party process in that, 
even though we have not yet solved the problem there. But, to 
be sure, as Secretary Rumsfeld discussed, we do have some 
concerns about the trends in the Chinese military. This is not 
to say that the Chinese military is of a size that will somehow 
threaten our vital interests, but certainly there are trends, 
there are rather substantial increases.
    But another aspect of the problem is the lack of 
transparency surrounding the military budgets there. In the 
United States, our military budgets are discussed openly in 
rather minute detail, as you know far better than I, but they 
are not done so in China. So, one of the problems is the 
transparency problem involving the budget and the procurement 
practices.
    Senator Murkowski.  So you would not give a title to 
either--it is not a destabilizing force, but it is not a 
stabilizing force. Somewhere in the middle.
    Ambassador Hill. Well, you were referring to the rise of 
China, generally, or to the rise of its military budgets?
    Senator Murkowski.  Well, I think his comment was to the 
military buildup, in general.
    Ambassador Hill. Clearly, it is something that we need to 
be looking at closely. And, clearly, it is something that we 
need to be concerned about. But, I would add, the difficulty of 
measuring it, the lack of transparency, and the overall trends 
do add up to something that we need to keep a watch on.
    Senator Murkowski.  Thank you.
    Senator Obama.
    Senator Obama.  Thank you very much, Madam Chairman.
    Just to follow up briefly on the questions surrounding 
North Korea. You know, the New York Times reported, in May, 
that China ruled out applying economic or political sanctions 
to pressure North Korea to abandon its nuclear weapons program, 
appearing to undercut a crucial element of the Bush 
administration's North Korea strategy. I guess, you know, one 
of the major concerns that we have on this committee is, How do 
we get North Korea to stand down on its military without, at 
least from my perspective, creating a worse problem than 
currently exists? And it seems China is critical in this role. 
Is it accurate to say, from your understanding right now, that 
China has essentially ruled out these sanctions as an 
alternative? And if they have, and if the Security Council is 
not an option, then do--have the Chinese offered us some 
alternative pressure points that can be applied?
    Ambassador Hill. Well, first of all, I do not want to say 
the Security Council is not an option. It is an option we 
always reserve for when we feel it is appropriate. To be sure, 
we want to solve this problem through the Six-Party Talks. I 
mean, we believe this is the right mechanism, and we believe it 
is in everyone's interest that this get done, including the 
North Koreans.
    Certainly, the Chinese have attempted to persuade the North 
Koreans, but I think you are quite right, Mr. Senator, that the 
Chinese have been clearly reluctant to use levers such as 
economic sanctions. Their major shipments into North Korea have 
to do with food and fuel; and, so far, they have been reluctant 
to use those levers.
    The Chinese, however, continue to believe that they will 
persuade the North Koreans to come back to the talks. And so, 
they take a somewhat longer-term view of it than some other 
people may. I mean, they believe that North Korea will 
ultimately see that its interests are in coming back to the 
talks, and they have constantly urged patience.
    Now, our concern, of course, is that the last time the 
talks took place was in June 2004, and we are fast approaching 
the one-year anniversary, where we have not had talks. 
Americans are sometimes known for their impatience, but I think 
a year is a long time. So, we would like to see this process 
going. We are working with the Chinese every day, and the 
Chinese understand--as I said earlier, to the Chairman's 
question--the Chinese understand that this is a major issue for 
us. We cannot allow a country like North Korea to retain 
nuclear weapons. We cannot allow them to have nuclear materials 
with the potential or the possibility that these could be 
proliferated. We need to address this problem. There are a lot 
of options, but the one option we do not have is to walk away 
from this problem. We have to engage. And I think the Chinese 
have that message. And let us hope the North Koreans get it, as 
well.
    Senator Obama.  Okay--another follow-up off the Chairman's 
question relating to Japan and China's influence in Asia--I 
appreciate and agree with your point, that China is a world 
power and a growing power, and it would be shocking if they 
were not interested in exerting their influence in their 
backyard. And it is a fact. I it was not clear to me exactly 
what Secretary Rumsfeld's point was in that Singapore 
interview. It strikes me that one of the things that we do have 
control over is our own behavior in that area. And, as you 
indicated, if we are doing a good job maintaining our military 
alliances in that area, if we are consistent in how we apply 
foreign aid in that area, then there is no reason why we can 
not have a strong United States in the Pacific, as well as a 
strong China. So, I appreciate that sentiment.
    I am concerned about some of the anti-Japanese 
demonstrations that seem to have been orchestrated, to a large 
degree, by the Chinese Government. I think that your point 
about history is a good one. But some of this also has to do 
with raw politics and strategic interests. One area, in 
particular, that seems to have been raising some issues between 
the two countries is the dispute over gas fields in the China 
seas. And, according to press reports, at least, China has 
refused the Japanese request to stop exploring gas fields. The 
Japanese, in turn, have turned down the Chinese proposal for 
joint development.
    I am wondering--on the specifics of that issue--how serious 
of an impediment is that to improved relations between the two 
countries. More broadly though, it strikes me that this goes to 
a larger issue, and that is China's need for energy and how 
that is going to have an impact, not only in Asia, in its 
relationship with countries like Indonesia, but also its 
relationship to countries like Sudan, where we may have some 
contrary policies with respect to Darfur, for example.
    I know that was a broad question, but----
    Ambassador Hill. It was a broad question, but a very good 
question. First of all, with respect to the military buildup, I 
want to be very clear, we are concerned about this buildup, and 
we see some trend lines that are troubling, to be sure. And 
Secretary Rumsfeld spoke about those. Secretary Rice spoke 
about those the other day. But we have to track that situation 
very carefully, and we have to see what these military forces--
what sort of capabilities they are trying to build up to. This 
is not just a question of raw numbers; this is a question of 
the change in those numbers, the trends, and also the kinds of 
capabilities that they are developing. And then when you add to 
that the problem of transparency and the fact that it is a 
difficult process to measure how the budgets are being handled; 
it is something that keeps the analytical community very, very 
busy. So, we have to track that very carefully.
    With respect to Japan, I completely share your point of 
view. To the extent that any street demonstrations were in any 
way officially inspired, this is obviously not acceptable. Now, 
the Chinese have said that they were not, but many independent 
observers say that they were. And, clearly, as someone who is 
served most of my career overseas as a diplomat, I like to make 
sure that, you know, the embassy that I am working in is going 
to enjoy the protection of the host country, as is required by 
the Vienna Convention. So, there are issues there to be 
concerned about.
    With respect to the issue of China and Japan actually 
seemingly competing, in, sort of, 19th-century terms, for 
energy, indeed, this strikes us as, sort of, a mercantilist 
problem that should not exist in the 21st century.
    Now, I want to say that although there has been some 
competition, there is also been some cooperation there, and we 
were pleased to see some Japanese delegations talking to 
Chinese delegations in trying to address this issue. Because, 
ultimately, the issue is not to remove energy resources from 
the world market; the issue is to develop energy resources so 
you increase the supply of energy and are able to moderate the 
price. So, we have seen some positive trends in terms of China 
and Japan working together on, especially, these offshore 
sources that you mentioned.
    Finally, you mentioned the overall global issue. China's 
energy needs are going to be enormous in the future. And China 
is----
    Senator Obama.  Sorry to interrupt, but do you--just to 
give the committee a sense of, sort of, the level of magnitude, 
in terms of the increases there--and I know I am out of time, 
Madam Chairwoman--just briefly, as you are talking about it, do 
you have a sense of what--you know, how rapidly those energy 
needs are increasing and----
    Senator Murkowski.  Senator Obama, I might just add that, 
on the second panel, we have got someone who will be 
specifically addressing those energy needs, if Mr. Hill does 
not have that information.
    Ambassador Hill. China uses about six million barrels a day 
of oil, and the United States uses about 20. And, in some 20 
years, we expect China to be up to some 20.
    One other statistic that I think is worth noting is, the 
per-capita income of China is still in the neighborhood of 
$1,200. If China continues to grow at, say, 9 percent, which is 
what they have been doing lately, probably by 2020, or 
something like that, they will be at $3,000 per-capita income. 
Per-capita income in the United States is variously estimated 
at about $30,000, just to give some order of magnitude to that.
    But let me say that China is looking for energy resources. 
The question is, Are they looking to develop energy or are they 
looking to take it off the market? And that is the issue that 
we need to be engaged with the Chinese. And we do have a very 
good dialogue with them on energy. The Department of Energy has 
an energy policy dialogue with China's National Development and 
Reform Commission. In the State Department, we have had a 
number of discussions with them, and will continue to do so.
    And, finally, there are commercial opportunities for U.S. 
firms. China is looking to build some 40 new nuclear power 
plants, and these involve a technology that some U.S. companies 
can really have something to offer.
    Senator Murkowski.  In keeping with the early-bird rule, we 
will, next, go to Senator Feingold.
    Senator Feingold.  I thank the Chair. And it really is hard 
to imagine a more timely and important matter to have a hearing 
about, and I thank you for your leadership on this.
    Mr. Hill, obviously you have a crucial job ahead of you in 
responding to the emergence of China throughout Asia and the 
world. And I am very pleased that you have talked previously 
about the need to prioritize human rights in China. I have 
tried over the years to be as vocal as I can be about the need 
for labor rights and religious tolerance and the promotion of 
human rights in China.
    I would like to ask you to talk about what the United 
States can do to ensure that, as China gains greater economic 
power, the Chinese Government does not mistakenly assume that 
human rights will become a less important part of the U.S./
Chinese relationships.
    Ambassador Hill. Well, thank you, Senator Feingold, for 
mentioning that issue, because it is one that is very dear to 
my heart and, I think, really to every American, because I 
think human rights is really part of the basic fiber of what we 
are.
    Let me say, though, that in every discussion--I mean, at 
every level with the Chinese officials--U.S. officials raise 
these issues. Sometimes we raise very specific issues about 
individuals, sometimes we raise broader issues, but I want to 
assure you, Mr. Senator, that human rights is very much a part 
of our ongoing dialogue and, I would say, an important part of 
our relationship with China.
    Last year, the State Department programmed some $13.5 
million to promote legal reform and judicial independence, 
transparency and public participation in government and 
fostering civil society. So, we are not only talking about it, 
but we are actually identifying specific programs where we 
believe we can make a difference.
    We have had some working-level discussions related to our 
human rights dialogue. They took place in November 2004 and 
February 2005. We do not believe there are any additional 
preconditions to resuming the formal bilateral human rights 
dialogue. But we based this dialogue not just on talking, but 
actually producing some results.
    As China emerges on the world stage, I think it is 
important--China emerges, and other countries emerge, too--it 
is important to understand that human rights and rule of law 
are really part of the ticket of being on that stage. To be a 
world power is to subscribe to certain universal values. Our 
job is to make sure the Chinese understand that from our 
perspective.
    Now, it is important to look at countries which have 
various levels of human rights, and to determine whether they 
are going in the right direction. And that is where we want to 
see that China is heading in the right direction. And so, China 
is a vast country with some vast problems, especially rural/
urban problem, where, you know, one would look at the human 
rights differently in different places. But what I want to 
assure you is, we are really on this one.
    Senator Feingold.  I do appreciate that statement and look 
forward to working with you on the matter of human rights in 
China.
    Another matter--this hearing really is not focused on it, 
because this hearing is focused on China's emergence in Asia--
the fact is that China has been able to win goodwill in a fair 
amount of other places in the world by assisting with 
development in other projects. For example, the Chinese 
Government is offering rather tangible support across Africa 
that creates goodwill and longstanding relationships--I heard 
about 20,000 Chinese workers building housing in Algeria, 
soccer stadium financial arrangements in Mali, and other things 
that the presidents or leaders of the countries, sort of, went 
out of their way to let me know was going on; and, presumably, 
in some cases, to secure access to African oil markets, but not 
necessarily exclusively for that purpose. Obviously, there may 
be a variety of reasons. The fact is, there is quite a 
presence. And sometimes I am struck by our lack of presence in 
those same countries.
    What is the United States Government doing, and what is it 
not doing that it needs to do, to respond to such efforts by 
the Chinese?
    Ambassador Hill. Well, first of all, we maintain a very 
active foreign policy throughout the world. There is no 
country, including China, that has as many embassies, as many 
diplomats, aid missions engaged throughout the world dealing 
with these problems. I think it is important that, when you 
make contributions to a country, you are taking precious 
resources--I call them ``precious'' because they come from our 
citizens--and you are making sure that those tax dollars are 
going to helping these countries deal with economic problems, 
helping them deal with problems of governance and capacity. And 
I would hope that, as China is growing, and China develops the 
ability to provide assistance, that they do it in a way that 
makes these countries better able to cope with problems of 
development.
    So, to be sure, we probably need to talk to the Chinese 
about some of these issues. I think it is very important that 
the Chinese, when they look to provide support to a country, 
that they do it in a way that is going to make that country 
better able to cope in the future.
    Frankly speaking, if you go back through our history and 
look at some of our early efforts at assistance, some of them 
did not pan out very well. And I think we have learned a lot in 
assistance. And if China's desire is to help poorer countries 
become better off, and ultimately become markets or become 
sources of goods, they should really be very careful how money 
is spent, so that it is encouraging good governance, not bad 
governance.
    Senator Feingold.  Thank you, Mr. Hill.
    I thank the Chair.
    Senator Murkowski.  Senator Voinovich?
    Senator Voinovich.  Congratulations on your new 
responsibility. I have had the privilege of working with Mr. 
Hill when he was Ambassador to Macedonia, and then the 
Ambassador to Poland, and I was very delighted to see you get 
this assignment.
    In your remarks, you said China's growth need not be at our 
expense, and--I am from Ohio, and if you travel my state, you 
will find that many people have said that their growth has been 
at the expense of our state, and particularly of manufacturing. 
We have a $162 billion trade deficit with China. Most of it is 
in manufacturing. And the question I have is, how involved--I 
know that you have got the State Department, and you have your 
Foreign Commercial Service offices that are part of the 
Commerce Department, located at the embassy--but how are you 
going to be involved in this whole issue of intellectual 
property rights violations that is occurring today, is rampant, 
and also the issue of the fixing of their currency, which many 
of us feel needs to be dealt with very soon?
    Ambassador Hill. Well, first of all, Senator, it is great 
to see you. We first met in a refugee camp in Macedonia, and it 
is a great pleasure to see you here.
    I think, on the issue of U.S. jobs, of U.S. goods and 
services, we absolutely have to be able to export. We need 
markets for our goods, and it is really not enough just to talk 
generally about the problems of free trade when people are 
losing their jobs in places like Ohio. I must say, Mr. Senator, 
every time we have talked, we have talked about the problem of 
people in Ohio and jobs and things like that. So, what I want 
to assure you of is, I understand that this is of crucial 
importance, because, ultimately, our country is not going to be 
able to be successful in the world if we can not export, if we 
can not have access to the markets. We have given access to our 
markets in a way that is simply unprecedented in the history of 
the world. I mean, we have basically helped countries come from 
nothing to being wealthy countries, thanks to our market. So, 
we do have to find ways--and, frankly, insist--that our goods 
have access.
    Now, IPR is a very important issue for us, because a lot of 
what we do in our economy depends on----
    Senator Voinovich.  Pardon me, is that going to be part of 
your portfolio, though? Because you have got intellectual 
property rights, you have got the Commerce Department, and you 
have the Patent Office, you have USTR----
    Ambassador Hill. Intellectual property rights are something 
that whenever you--whenever I see a foreign official in Asia, 
it is one of the things I raise. And, certainly, whenever we 
talk to the Chinese, it is one of the things I raise. So, I 
raise it, and the question is, Do I go through the motions, or 
do I take it seriously? And I want to assure you that I 
absolutely take it seriously.
    With respect to the issue of the exchange rate, as you 
know, Treasury takes the lead on that. I think you know, 
obviously, that this is an issue involving our leadership at 
the very highest level--and, certainly, I do my part there, but 
that is something that is being led by our Treasury Department.
    Senator Voinovich.  Well, I think that one of the things 
that took my attention, I think it was a couple of years ago, 
is, when we got into the whole issue of China's fixing their 
currency, and the only people that could talk about it were the 
Secretary of Treasury and Condoleezza Rice, who was over at the 
National Security Council. And there are many people that think 
that perhaps we have not been as aggressive as we should be on 
the economic side, because of the fact that we are relying so 
heavily on China to provide leadership to dealing with the 
problem that we have got with North Korea. Would you like to 
comment on that?
    Ambassador Hill. I deal, quite often, on the problem of 
North Korea. And I believe pretty firmly that when you look at 
our policy toward China in the economic area, especially in the 
exchange-rate area, that it is not constrained by our policy to 
North Korea. North Korea is a big priority for us, obviously--
the presence of nuclear weapons, the danger of the nuclear 
weapons, the danger of proliferation--but that does not mean 
that we cannot pursue policies that can help the American 
worker. So, I think we are prepared to do both and to make them 
both very high priorities.
    Senator Voinovich.  Well, I will say that, you know, we are 
going to be getting various trade agreements coming before 
Congress, and I think one of the biggest impediments, in terms 
of getting those trade agreements passed is the enforcement of 
our trade laws. And I am glad to know that the State Department 
is going to be active, in terms of letting people know how 
important they are.
    The other issue is the issue of the environment. We have 
been criticized roundly because we have not signed the Kyoto 
Treaty. And one of the reasons we have not done it is because 
the developing nations are exempt from it. Is there anything on 
the table at the State Department to perhaps get involved in 
that issue, in terms of China? Because I think if they are not 
brought on to--in to the table, we are never really going to 
get anywhere with the environment. I spent a week over there, 
and their environmental problems are horrendous. In fact, some 
argue that 20 percent of the mercury in the Great Lakes comes 
from the ASEAN. Is that going to be on your plate as one of the 
issues that you are going to be talking about?
    Ambassador Hill. That is definitely on the plate of the 
State Department. We have a bureau that deals with that--OES--
and it is certainly something that the Commerce Department and 
others have been concerned about. It has not directly been on 
my plate, as the Assistant Secretary for East Asia Pacific 
Affairs, but, Senator, I can not agree with you more. I have 
been to China, I have seen some of those problems. In fact, I 
lived in Korea and felt some of those problems in the air. So, 
I completely agree with you, the environment is an issue that I 
think the Chinese, themselves, understand the need to do more 
about. We do have a dialogue with them, conducted through the 
State Department, and, I agree, we need to do more.
    Senator Murkowski.  Thank you.
    Mr. Hill, I have a couple of more quick questions, and then 
we will see if others have any additional questioning.
    You mentioned, in your initial comments, just very briefly, 
Taiwan and the impact, if you will, or the recognition that the 
anti-secession law was unhelpful and is--essentially, is a step 
back. Given China's, certainly, increasing role in the area, 
and the relationships that we are seeing being built, how does 
this affect how the U.S. is handling, or dealing with, the 
policy regarding Taiwan? Does it change at all?
    Ambassador Hill. Well, our policy has been pretty firm and 
pretty consistent. We have encouraged both Taiwan and China to 
engage in a dialogue that will lead to a peaceful resolution of 
their differences. And it is based on our one-China policy, the 
three joint communiques, and the Taiwan Relations Act. And, 
again, we have been very consistent about this, that we do not 
support Taiwan independence. But I also want to emphasize what 
President Bush told Chinese Premier Wen in December 2003, which 
is that we oppose unilateral moves, by either side, that would 
try to alter the status quo.
    We have made clear to the Chinese--including Secretary 
Rice, during her trip--that the anti-secession legislation was 
unhelpful and did not contribute to the kind of dialogue we 
feel is essential, but we do believe that there is now some 
basis for a substantive dialogue, that there were some trips by 
the Taiwan opposition, of course, and we would like to see this 
carried over to discussions with the Taiwan authorities.
    The United States continues to pursue unofficial relations 
with the people of Taiwan. We also support Taiwan's engagement 
with the international community in appropriate venues that do 
not require statehood for membership. And that is why we 
continue to support the goal of Taiwan's participation in the 
World Health Assembly. Taiwan was not successful in obtaining 
World Health Assembly observer status this year, but this does 
remain our goal.
    And, again, our support for observer status for Taiwan does 
not conflict with our one-China policy.
    Senator Murkowski.  So, nothing really has changed, in 
terms of how the U.S. is viewing the situation or its policy as 
it relates to Taiwan.
    Ambassador Hill. We are certainly very keen observers of 
the situation. We have certainly made clear our views of the 
need for dialogue and our opposition to unilateral moves, but I 
would not say these are new policies.
    Senator Murkowski.  And then, just one last question. How 
will the stability of the region be affected if the E.U. arms 
embargo should be lifted?
    Ambassador Hill. Well, we have made clear to the European 
Union that we think this is really the wrong way to go. We have 
a Chinese military that has rather steep growth, as Secretary 
Rumsfeld and Secretary Rice mentioned. So, we do not feel this 
is any time at all to be lifting the arms embargo on China. The 
original reasons for it, for the embargo, are, I think, still 
in place. And, moreover, I think, in the wake of the anti-
secession law, it should be abundantly clear to everybody that 
this would be a very unwelcome move.
    We are trying to engage the Europeans in a strategic 
discussion of how we see the situation in Asia, of how they see 
the situation in Asia, to try to bring our understanding of the 
situation in Asia closer together so we will not have any kinds 
of miscom-munications. But, clearly, we remain very firm in our 
opposition to changing the embargo.
    Senator Murkowski.  Do you feel you are making progress in 
those discussions, then?
    Ambassador Hill. Well, I do. I think we had a very good 
discussion in Brussels recently, where we discussed how we see 
the situation in Asia, where we had a strategic dialogue with 
the Europeans. And I was very pleased at the level of discourse 
and the fact that I think we have a lot of common ground.
    And I want to stress that, although we often disagree with 
the Europeans, and this was one of those issues, we do retain a 
lot of common ground with them, and I think this was very much 
on display when we were talking in Brussels last week.
    Senator Murkowski.  Thank you.
    Senator Obama?
    Senator Obama.  Yes, just a couple of quick follow-up 
questions. You know, Senator Voinovich and I share a similar 
economic profile in our states, a manufacturing base that is 
deteriorating rapidly, so two comments just to follow up on his 
questions.
    The first is, What is your assessment of how much 
difference a revaluation of the yuan would actually have, in 
terms of our constantly spiraling trade deficit with China? And 
if that is not the main problem, is there any administration 
policies that are in the works that might try toreverse that 
trade imbalance? That is question number one.
    Question number two, with respect to intellectual property, 
I mean, this is an area where I think there is less dispute, 
that there just are no serious intellectual property 
protections in China. You know, I was meeting with the CEO of 
Starbucks, and he was remarking on how if you go to China, 
there is Starbucks everywhere; the only problem is, they are 
not owned by Starbucks. People have just started up a bunch 
of--they have the same logo, it looks identical. I guess the 
coffee is not as good.
    So, you know, this is different from just, you know, 
bootleg DVDs. I mean, this is something where you have got a 
physical store there for everybody to see, in which a U.S. 
trade market is being encroached upon.
    But my question on the trademark issue is, Are we being 
flexible enough and thoughtful enough about how to structure 
trademark protections in an economy in which grafting U.S. 
trademark law, or intellectual property law, copyright, may not 
be perfectly appropriate? I can not imagine that people in, you 
know, rural China can afford whatever it is that I am paying 
for a DVD for my kids, the Little Mermaid or something. So, 
that it may not be a exact transplantation of all our laws, but 
we might still have some semblance that--of intellectual 
property protection that takes into account that China's at a 
different stage of development? I am wondering whether we are 
being sufficiently flexible and creative in exploring how we 
can get around some of those problems.
    Ambassador Hill. Well, first of all, you are absolutely 
right, there is a big problem; and it continues to be a big 
problem, in terms of China improving its intellectual property 
rights protection. In fact, we really do need to see some 
actual reduction in the counterfeit rates--in the piracy and 
counterfeit rates, and we are not seeing those yet. So, this 
is--I am not going to hide it from you, this is a big problem.
    The U.S. Trade Representative recently elevated China to 
the priority watch list under the Special 301 review. And we 
are using WTO TRIPS agreement's transparency provisions to 
formally request specific evidence from China on the operation 
and administration of its IT enforcement. That is to say, we 
are really pushing them very hard, using the various levers 
that we have available through international trade agreements 
to push them on it. So far, it does not seem to be enough. And 
I think we have to continue to push them on this. We are----
    Senator Obama.  Can I just interrupt you on that point----
    Ambassador Hill. Yes.
    Senator Obama  (continuing). ----on the WTO issue? China 
feels it is benefitting from its WTO membership. Is the problem 
here that it is just there are so many exhaustive requirements 
and steps we have to go through before we finally go ahead in 
getting a ruling from the WTO that they are violating----
    Ambassador Hill. Well, I want to emphasize that I am 
interested in this issue. I raised this issue with the Chinese, 
but I am not the expert that can talk to you specifically about 
the questions of rights and responsibilities under the WTO. 
But, you know, certainly, we need to continue to press this. 
And what I want to assure you of is, we do not just leave this 
for the Department of Commerce, for example, because I think 
the Chinese need to hear this from all of us--State Department, 
as well--to make very clear that we are very concerned about 
this, and this is a major issue in our bilateral relationship.
    With respect to the currency question, most analysts--first 
of all, I--again, I want to be very careful about this. This is 
something that the--Secretary Snow speaks to, in the Treasury 
Department, not me. But I will say that the locus of analysis 
on changing the exchange rate--the analysts do not feel it 
would make a big difference in the short run, but certainly if 
it were done, it would be a very key indication of China's 
willingness to do more and address this overall problem.
    You know, ultimately, I think one can borrow a term used 
normally in the environment, ``sustainable development.'' I 
think, ultimately, China needs to look at the U.S. market as 
something that it needs, not just this year or next year, but 
for decades to come. And I think when the Chinese look at our 
market, for decades to come, they will see the need to work on 
these issues, to clean up these issues, so that this trading 
relationship we can have is sustainable. And that is the kind 
of approach I would try to get, very specifically, on these 
issues. And, you know, there is not much macro-management of 
these things. You have got to get right into the individual 
subjects and go after each and every one of them. And what I 
want to assure you is that I am willing to do that.
    Senator Obama.  Just one last comment. This is more of a 
comment than a question, but feel free to share your thoughts 
on this. On a couple of these issues, one of the things that I 
hear from businesses that are concerned about intellectual 
property encroachment in China, or trying to break through non-
tariff barriers in China to increase our exports, is a lack of 
coordination among the various branches of the U.S. Government 
and a preference, in certain circumstances, to simply avoid the 
U.S. Government entirely in dealing with China, because they 
are fearful that, either because of the lack of coordination or 
a not-very-nuanced strategy, that sometimes the U.S. Government 
can do more harm than good, and the Chinese Government can end 
up penalizing them in ways that they are not happy with.
    So, just an observation. That is something that I have 
heard directly from those who are doing business in China. It 
is not something that I have firsthand knowledge of. But I 
think it would be useful, since, during the testimony, you 
referred to the fact that this is Commerce's issue, or this is 
Treasury's issue. And I appreciate lines of responsibility and 
expertise and divisions of labor, but it just seems to me 
that--with such a critical relationship at stake here, and so 
many concerns on the part of our constituents back home that it 
is very important that we have very good coordination between 
USTR, Commerce, Treasury, and your Department, as well.
    Ambassador Hill. I absolutely share your sentiment on that. 
We do need to be well coordinated. And I stress to you that, 
while I said that this is Commerce's area, I take a great 
interest, and I think it is important for China, and any other 
country, to understand that this is a thought-out position 
across-the-board in the U.S. Government because we too work for 
your constituents back home, and we are very aware that we 
cannot have free trade if our people do not support it.
    Senator Obama.  Thank you.
    Senator Murkowski.  Senator Voinovich?
    Senator Voinovich.  Yeah, I would like to comment. Senator 
Obama, one of the things that I have been working on for the 
last, probably year and a half is the very issue that you are 
talking about. And I brought this issue of lack of 
coordination--in fact, I had a hearing on the Oversight of 
Government Management Restructuring to look at Commerce, USTR, 
Customs, Patent Office, and the Commerce Department has come up 
with a new program called STOP. And it is a one-stop shop, 
where a small company that feels that they have been stepped on 
can go to Commerce and get some quick results, in terms of 
their problem. I am going to be having another hearing to find 
out whether or not they have the manpower to enforce the law--
or, not the law, but the program, and also to see if they have 
had any success. And I am going to be interested--when I was 
with Premier Wen, I spent about an hour and 20 minutes with him 
about two months ago, and we talked about intellectual property 
rights. I brought to his attention, Mr. Hill, Ambassador, three 
cases, exactly--Ohio, the company that makes these lights on 
tops of police cars; Gorman-Rupp, that makes pumps; Step2, that 
makes toys--and basically challenged him to do something about 
it. In other words, we get a lot of lip service from them, but 
the real issue is to have them follow up and really show that 
something is happening. And I applaud you for what you are 
doing, but I think you need to redouble your efforts, because 
if we do not get this thing straightened out, as I mentioned to 
you earlier, we are going to have a real problem, in terms of 
international trade. Now, certainly, Ambassador Zoellick gets 
it. But we have really got to do some work in that area if we 
expect to be--if we are going to have any more trade agreements 
and, you know, move our--us ahead in international trade.
    The other thing I would like you to comment on is that 
everyone seems to think that this anti-secession legislation 
the Chinese passed was very bad. And one of the points of view 
that I got from Premier Wen was that, ``Yes, we did that. But 
the fact of the matter is that we are probably going to--
increasing more dialogue and more commercial exchange under 
this administration than at any time before.'' The question I 
have is--you mentioned that he met with the minority 
representatives from Taiwan. Do you see any other activity 
there that shows that perhaps they did pass the anti-secession 
legislation, but that, on the other hand, they have improved 
their relationship with Taiwan in some other regards over what 
it was before?
    Ambassador Hill. Well, I think, clearly, the dialogue with 
the opposition leaders was a good step, and I think it did 
allow a change in the dynamic following the anti-secession law. 
And the problem with the anti-secession law is, of course, that 
it reiterates that they reserve the right to use non-peaceful 
means. And that is what, I think, many, many people were 
concerned about.
    Whether they are able to capitalize on this step, whether 
they are able to follow through, remains to be seen. The 
Beijing Government is not yet prepared to deal with the elected 
authorities in Taiwan, because they are rejecting the condition 
that the elected authorities set forward. And I think our view 
would be, dialogue should just be dialogue, and should not 
depend on any conditions, and that, ultimately, when--anyone 
who has been to Shanghai and looked at the region there, or 
anyone who has looked at the Taiwan coast, realizes this has to 
be solved by peaceful means. There is absolutely no other way 
to do it. And the way to solve it is to have broader dialogue. 
So, I hope that they will follow up and pursue it.
    Senator Voinovich.  North Korea, the way I observe the 
situation is, that both the South Koreans and the Chinese do 
not seem to appreciate the nuclear threat of North Korea, and 
that they are trying to go about doing it through an economic 
relationship that is going to soften them up a bit and get them 
to realize that life will be better if you back away from this 
and open your doors and start to work with the rest of the 
world.
    Ambassador Hill. Well, I would rather emphasize that, in 
the six-party process, there is a lot of agreement on how to 
proceed. And I think we have been really in sync with the South 
Korean Government on how to do this. Now, to be sure, South 
Korea has a special situation, in that their country, Korea, 
was divided, brutally divided, in the middle of the 20th 
century. And I think those of us who deal with the South 
Koreans, who encourage them or who are concerned about some of 
their policies, we have to bear in mind that very brutal fact 
that is so deeply, deeply troubling to their people there.
    But, you are quite right, they do have an idea that--in the 
long run--engagement is probably the way to go to change that 
society, and certainly that is an important priority for them, 
as reflected in the inter-Korean dialogue, which has gotten 
going again this month. In fact, there are some meetings coming 
up next week. But, at the same time, they understand, they 
fully understand, that there cannot be nuclear weapons on the 
Korean Peninsula. And I think the question--you know, there may 
be nuances of difference over how to solve it, but I think 
everyone understands this needs to be solved.
    Senator Voinovich.  Thank you.
    Senator Murkowski.  With that, thank you, Mr. Hill. 
Appreciate your time that you have spent here this afternoon 
with the subcommittee, and for sharing your thoughts as China 
emerges and develops.
    And, with that, we will call the second panel.
    We will welcome to the second panel Dr. Minxin Pei, the 
Senior Associate for the Carnegie Endowment for International 
Peace; Dr. Mike Herberg, the Director of Asian Energy Security 
Program at the National Bureau of Asian Research; and Professor 
Catharin E. Dalpino, the Adjunct Professor of Southeast Asian 
Studies.
    So, welcome. Thank you all for joining us this afternoon. 
We have a little bit less time for the second panel, but I am 
certainly looking forward to hearing your comments. And thank 
you for taking the time.
    With that, why do not we start at this end, with you, Dr. 
Pei, and we will move to the--to my left, following that. So, 
if you will give your comments, please?

 STATEMENT OF MINXIN PEI, SENIOR ASSOCIATE, CARNEGIE ENDOWMENT 
           FOR INTERNATIONAL PEACE, WASHINGTON, D.C.

    Dr. Pei. Thank you very much, Madam Chairwoman.
    I have prepared an extensive written comment--written 
testimony for today's hearing. In the time allotted to me 
today, I will summarize the main points of my testimony, but I 
request that the full testimony be entered into the record for 
today's hearing.
    Senator Murkowski.  Your full testimony, as well as that of 
the other panelists, will be included in today's record.
    Dr. Pei. Thank you.
    The emergence of China as a major global power is one of 
the most important developments facing the United States. In 
designing its policy toward China, one of the most critical 
factors that should inform American policymakers is China's 
internal political evolution. As we all know, China has been 
transforming its economy since the late 1970s, and this process 
has brought China into the international community and improved 
lives of Chinese people.
    During this process of economic modernization, China's 
political system has also begun to evolve. One of the most 
important aspects of this political evolution is the reform of 
China's legal system. Generally speaking, China has made mixed 
progress in building a modern legal system that can effectively 
protect property rights and human rights. On the positive side, 
China has, over the last 25 years, passed nearly 400 laws that 
have laid the foundations for a modern legal system. Especially 
noteworthy is the progress made in the passage--implementation 
of commercial laws designed to facilitate trade and protect 
investment. Considerable progress has also been made in 
modernizing administrative laws. Some progress has been made in 
improving the criminal code. The Chinese Government has also 
amended the constitution and enshrined the protection of human 
rights and private property rights in the constitution.
    Also on the political side, legal reform has begun to have 
a healthy impact on China's social and economic activities. 
Chinese citizens and private entrepreneurs are increasingly 
using the legal system to protect their personal and property 
rights. The number of lawsuits filed in civil courts has been 
rising steadily. Chinese courts handle about five million civil 
suits today. This indicates some rise of confidence in the 
court system. Chinese citizens have also begun to sue local 
governments for abuse of power.
    However, despite such progress, China has not established a 
genuine modern legal system or a rule of law. The momentum of 
legal reform has slowed since the 1990s. Many important legal 
reform measures that ought to have been taken are delayed, some 
indefinitely. There is no sign to indicate that the Chinese 
Communist Party is genuinely committed to building a modern 
legal system.
    The following are the most glaring weaknesses of the 
Chinese legal system today:
    First, lack of judicial independence. The court system is 
controlled by the Chinese Communist Party and local 
governments. Judges are appointed by the party and local 
governments. Judges lack job security and power to adjudicate 
court cases. The courts are dependent on local governments for 
funding. Party and government officials routinely interfere in 
court decisions.
    Second, weak judicial authority. Because Chinese courts are 
really part of the state bureaucracy, they typically lack the 
political authority to enforce their decisions. As a result, 
court judgements cannot be enforced if they are resisted by 
local authorities.
    Third, judicial corruption. The political control over the 
court system has led to widespread corruption in the legal 
system. Unethical judges routinely take bribes in exchange for 
judgements favoring those who offer the bribes. Chinese press 
often carries reports of senior judges being prosecuted for 
corruption.
    Finally, low respect for the law. This is largely because 
laws on the books in China are not enforced, or are ignored, by 
the government, itself, in reality. This has created a huge 
discrepancy. While a large number of Chinese laws have strong 
provisions for individual and property rights, in reality such 
provisions have little meaning, because the government, 
especially local authorities, can ignore them with impunity.
    It is clear that the Chinese Government is aware of these 
problems, and reformers within the Chinese Government have been 
trying to address them for a long time. But, so far, judging by 
the facts on the ground, it appears that China remains far away 
from its own declared goal of ruling the country according to 
law.
    Thank you.

    [The prepared statement of Dr. Pei follows:]

                    Prepared Statement of Minxin Pei

    I want to thank the committee for giving me the honor to testify 
today on China's legal reform in recent years. My remarks are divided 
into three parts. The first part describes the progress made in the 
strengthening of China's legislative institutions and analyzes the 
limits of this process. The second part addresses the progress and 
limits in China's legal reform. The last part comments on policy 
options for the United States.

  I. PROGRESS AND LIMITS IN BUILDING LEGISLATIVE INSTITUTIONS IN CHINA

    The emergence of the National People's Congress (NPC) and, to a 
lesser extent, local people's congress (LPC), as major actors in 
decision-making in China in the reform era has been hailed as a sign of 
political institutionalization or even pluralization. The growth of the 
NPC as one of the most important political institutions in China has 
been extensively documented.

    Legislative Output: The most important achievement of the NPC was 
its enormous legislative output (Table 1). The several hundred laws and 
resolutions-passed by the NPC since 1978 have provided the legal 
framework for economic reform and rationalized administrative 
procedures. For example, of all the laws and resolutions that were 
enacted by the NPC from 1978 to 2002, 95, or about a third, were 
``economic laws.'' Of the 216 new laws passed from June 1979 to August 
2000, 126 were classified as ``administrative laws.'' But these numbers 
should not be taken at face value. In the passage of most laws, the NPC 
has largely played a secondary role, endorsing the bills drafted by the 
executive branch. On a few rare occasions, the Standing Committee of 
the NPC showed its autonomy by rejecting the bills proposed by the 
government. Like the NPC, LPCs rarely rejected bills proposed by local 
governments. When they do, it becomes national news, as in the case of 
the People's Congress of Shenzhen which voted down, in 2004, a law on 
auditing and supervising the local government's investment, an 
unprecedented act of political independence. Official figures also 
indicate that individual legislators play an insignificant role in law-
making. Not a single bill proposed by NPC delegates has been enacted 
into law. For example, from 1983 to 1995, more than five thousand bills 
were proposed by delegates, but only 933 (18 percent) of them were 
referred to committees. There was no record that any of the proposed 
bills ever becoming law.

  Table 1. Legislative Output of the National People's Congress (NPC),
                                1978-2003
------------------------------------------------------------------------
                                                           Resolutions
                 Years                    Laws Passed         Passed
------------------------------------------------------------------------
Fifth NPC (1978-1983).................              41               19
Sixth NPC (1983-1988).................              47               16
Seventh NPC (1988-1993)...............              60               27
Eighth NPC (1993-1998)................              85               33
Ninth NPC (1998-2003).................              74             n.a.
------------------------------------------------------------------------

    Constitutional Oversight Power: On paper, the constitutional 
oversight power of the NPC has expanded significantly. The NPC 
supervises the courts and appoints and removes officials. It also 
investigates and oversees the work of the executive branch, approves 
the work reports of the State Council, the Supreme People's Court, and 
the Supreme People's Procuratorate, reviews and approves budgets, and 
provides legislative interpretations. The NPC can review the 
constitutionality of laws, inspect the implementation of specific laws 
by supervising individual court cases, hold hearings, conduct special 
investigations, and impeach and dismiss government officials. But in 
reality, the NPC has seldom asserted its formal oversight power. For 
example, the NPC has never declared a law unconstitutional or rejected 
a working report by the State Council, the Supreme People's Court, or 
the-Supreme People's Procuratorate. It had never refused to approve a 
budget, launched its own special investigations, or initiated 
proceedings of dismissal against a single government official. The 
NPC's inspection tours or hearings do not appear to have had any impact 
on policy, either. The most visible expression of the NPC's oversight 
power is rather symbolic: each year, about 20 percent of the NPC 
delegates voted against the work reports of the Supreme People's Court 
and the Supreme People's Procuratorate.
    By comparison, in some provinces, cities, and counties, the LPCs 
occasionally have tried to be more assertive. LPC members sometimes 
take local bureaucracies to task for poor performance and corruption. 
Deputies of LPCs sometimes demanded audits of the expenditures of local 
governments and criticized local governments' commercial deals and 
corrupt activities. In wielding one its most controversial oversight 
powers, LPCs also began to monitor judicial proceedings, mainly as a 
response to rampant corruption in the judicial system. LPCs' oversight 
of judicial proceedings in both civil and criminal cases can force 
courts to conduct trials with greater transparency and integrity. 
Typically, LPC delegates would review files, interview witnesses, and 
sit in on trial proceedings. In one instance, such intervention helped 
free a peasant wrongly convicted of drug trafficking.

    Appointment and Removal Power: Another noteworthy development is 
that LPCs have become an arena in which bureaucratic and factional 
politics begin to influence, in a very limited way, the appointment of 
local officials. Because Chinese law mandates ``competitive elections'' 
(cha'er xuanju) for senior local officials, LPC delegates have an 
opportunity to use such (indirect) ``elections'' to foil the 
appointment of official candidates and elect their own choices. Under 
Chinese law, an official candidate cannot be appointed if he/she fails 
to gain half of the votes of the delegates. LPC delegates can also 
write in their nominees. In Liaoning in the late 1990s, for example, 
the CCP's provincial organization department (POD) reported that an 
increasing number of official candidates could not be confirmed by LPCs 
due to factionalism, poor lobbying by the party, and unattractive 
nominees. Local legislators occasionally were successful in nominating 
and electing their own candidates to local offices. In five cities in 
Liaoning, twelve ``independent'' candidates were elected to local 
offices. Similar incidents occurred in Hangzhou's twelve counties in 
the 1990s. Each time the county people's congress appointed officials 
nominated by the party, an average of six to nine official nominees 
would fail to be appointed, while the same number of unofficial 
candidates nominated by the delegates themselves would get ``elected.'' 
In the counties where the LPC delegates were the most assertive, about 
10 to 15 percent of the official nominees would fail to get elected. In 
practice, however, such revolt by LPC delegates is rare, and nearly all 
the candidates nominated by the CCP are appointed. According to a 
senior NPC official, from the mid-1980s to the mid-1990s, only 2 
percent of the candidates nominated by the provincial CCP committee 
failed to win ``elections'' at the provincial people's congress.

    Organizational Growth: Organizationally, the NPC has grown 
considerably as well. The body had only 54 full-time staffers in 1979. 
By the mid-1990s, the number had risen to about 2,000. The NPC's 
committee system grew as well. From 1983 to 2003, the number of 
specialized committees in the NPC Standing Committee rose from six to 
nine. Nationwide, the number of staffers in the people's congress 
system at and above the county-level reached 70,000 by 1997. However, 
as a whole, the membership of the NPC and LPC does not mirror Chinese 
society. Rather, it appears to better represent the bureaucratic 
interests of the Chinese state and the ruling CCP. For example, nearly 
all of the 134 members of the 9th NPC Standing Committee (average age 
63.4) were retired government and party officials. CCP members make up 
about two-thirds of the delegates to the NPC and LPCs.

                  II. LEGAL REFORM AND ITS LIMITATIONS

    The record in-legal reform since the late 1970s has been mixed. 
While the Chinese government has made unprecedented progress in many 
areas of legal reform, the Chinese legal system remains structurally 
flawed and ineffective because the CCP is fundamentally unwilling to 
allow real judicial constraints on the exercise of its power.
    The motivations to undertake even limited legal reform were 
compelling for the CCP in the post-Mao era. To restore political order 
and create a new legal framework for economic reforms, reforming and 
strengthening the legal system was a top priority for the Chinese 
government. Indeed, China's legal system, developed under a planned 
economy and wrecked by a decade of political turmoil during the 
Cultural Revolution, was inadequate, outdated, and ill-suited for a 
transition economy. Economic reform would have been inconceivable 
without reforming the legal system. Thus, the CCP's need for survival 
through economic reform overlapped with the practical necessity for 
legal reform.
    To be fair, the progress in legal reform since the end of the Mao 
era has been unprecedented in Chinese history, as reflected in the 
passage of a large number of new laws, the increasing use of the courts 
to resolve economic disputes, social and state-society conflicts, the 
development of a professional legal community, and improvements in 
judicial procedures. As a result, legal reform has greatly increased 
the role of courts in adjudicating civil, commercial and administrative 
disputes. As indicated by the data on the rapid growth of commercial, 
civil, and administrative litigation, Chinese courts have assumed an 
indispensable role in resolving economic, social and, to a limited 
extent--political--conflicts (Table 2). A number of empirical studies 
on commercial and administrative litigation show that, despite its 
flaws, China's legal system is capable of providing limited protection 
of property and personal rights. In addition, China's legal profession, 
including judges and lawyers, has expanded rapidly during the reform 
era. The number of lawyers rose from a few thousand in the early 1980s 
to more than 100,000 in 2002. The number of judges nearly doubled from 
the late 1980s to the late 1990s. As measured by educational 
attainment, the qualifications of the legal profession have risen 
dramatically as well. The percentage of judges with a college or 
associate degree rose from 17 in 1987 to 40 in 2003. Of the 100,000 
lawyers in 2002, 70 percent had undergraduate degree and better and 30 
percent had only dazhuan (equivalent to an associate degree) or lower. 
However, the overall level of professional legal qualification remains 
relatively low, especially measured by western standards.

                                    Table 2. Growth of Litigation, 1986-2002
                                  (Cases Accepted by Courts of First Instance)
----------------------------------------------------------------------------------------------------------------
                             Year                                 Commercial         Civil        Administrative
----------------------------------------------------------------------------------------------------------------
1986.........................................................          308,393          989,409              632
1990.........................................................          598,314        1,851,897           13,006
1996.........................................................        1,519,793        3,093,995           79,966
1999.........................................................        1,535,613        3,519,244           97,569
2000.........................................................        1,297,843        3,412,259           85,760
2002.........................................................                     \1\ 4,420,123           80,728
----------------------------------------------------------------------------------------------------------------
\1\ Including both commercial and civil lawsuits.

    But behind these numbers lies a different political reality. For 
all the progress in reform, China's legal system remains politically 
hobbled by the ruling party's restrictions. Legal reform was apparently 
losing momentum in the late 1990s. For example, the growth of civil and 
administrative litigation slowed in the late 1990s, peaked by 1999, and 
began to decrease afterwards. As Table 2 shows, the total number of 
civil and commercial cases fell from more than 5 million in 1999 to 
about 4.4 million in 2002 (a 12 percent decline over three years). 
Administrative litigation cases registered even more dramatic declines. 
After peaking in 2001, with 100,921 cases filed, the number of 
administrative lawsuits fell to about 80,000 in 2002, back to the level 
of 1996. Such broad and large declines in litigation may be indicative 
of the poor performance of the court system and the consequent erosion 
of the public's confidence in the courts' ability to adjudicate justly. 
Although there are no data available about the trial outcomes of civil 
cases, the trend of administrative litigation suggests that the decline 
in the-number of administrative lawsuits filed against the government 
may be directly related to the increasing difficulty with which 
plaintiffs were winning these cases in courts (which in turn reflects 
the courts' pro-government bias). For example, plaintiffs suing the 
government had an effective winning rate of 38.3 percent (including 
favorable court judgments and settlements) in 1993. This rate rose to 
41 percent in 1996, but fell to 32 percent in 1999. By 2002, the rate 
plummeted to 20.6 percent, half of the level reached in 1996.It is 
likely that the decreasing probability of receiving judicial relief 
through the administrative litigation process has discouraged many 
citizens from taking their cases to the courts.
    The rapid growth of the legal profession has not led to the 
emergence of a genuinely independent bar or a well-trained judiciary. 
The government maintains tight restrictions on lawyers in their 
representation of their clients. The Lawyers' Law (1996) provides for 
inadequate protection of lawyer's rights, leaving lawyers vulnerable to 
harassment and persecution by local officials. According to the 
president of the Chinese Lawyers Association, the number of incidents 
in which lawyers were mistreated was large.Law enforcement officers 
frequently assaulted, detained, and verbally abused lawyers. Many 
lawyers were wrongfully convicted and sentenced to jail terms. Lawyers' 
rights to defend their clients in court were restricted. Some lawyers 
were ejected from courts without justification. Despite a massive 
effort to raise the qualifications of judges, the overall level of 
professionalism of the judiciary is very low. For example, 60 percent 
of the judges in 2003 had not received a college or college-equivalent 
education. A large number of sitting judges, many of whom are former 
officers in the People's Liberation Army (PLA), have dubious legal 
qualifications.Perhaps the most revealing evidence that the rule of law 
is fundamentally incompatible with a one-party regime is the CCP's 
steadfast refusal to undertake the necessary reforms to correct the two 
following well-known institutional and structural flaws in the Chinese 
legal system--even though they have long been identified and numerous 
remedies have been proposed. For example, in a study commissioned by 
the Supreme People's Court to amend the ``People's Court Organic Law,'' 
two leading academics detailed a long list of the symptoms that 
manifested these flaws. What is remarkable about the proposal by these 
two academics is that similar proposals had been floated before but 
were never acted upon by the Chinese government. To the extent that 
reforms are adopted to address the critical weaknesses in the legal 
system, the measures implemented by the government tend to be piecemeal 
and technical. They try to remedy the less controversial procedural 
flaws while avoiding the most sensitive political issues.

    Politicization of the Courts and Lack of Judicial Independence: As 
a judicial institution, Chinese courts are heavily politicized and 
deprived of the independence crucial to their role as guardians of 
justice and adjudicators of disputes. The politicization of the courts 
is reflected in the control exercised by the CCP over the various 
aspects of the courts' operations. For example, each level of the CCP 
organization (down to the county level) has a special political and 
legal committee (zhengfa weiyuanhui) headed by a senior party official. 
The committee directly makes decisions on important policies and issues 
related to the courts and law enforcement. In many cases, this 
committee even determines the outcomes of major court cases. In terms 
of judicial appointments, the CCP's organization department nominates 
candidates for the presidents and vice-presidents of courts (often 
regardless of their judicial training or the lack thereof). In the case 
of the SPC, the members of the party committee of the SPC (who are the 
most senior judge-officials of the court) are appointed and supervised 
by the Central Committee of the CCP, and the members of the party 
committee of provincial high courts are jointly supervised by the party 
committee of the SPC and the provincial party committees. The members 
of the party committees of intermediate courts are under the direct 
supervision of the party committees of the provincial high courts. The 
CCP's control of the most senior judicial appointments profoundly 
affects how judgments are determined by the courts.
    Additionally, judicial independence is compromised by local 
governments which wield enormous influence over the courts through 
their control of judicial appointments and court finances. Dependent on 
the local governments for funding, services, and political support, 
Chinese courts find it hard to try cases fairly where the economic and 
political interests of the local governments and officials are at 
stake. In the most crucial respects, Chinese courts are run like other 
government bureaucracies and follow a similar modus operandi. 
Administrative ranking or seniority, not judicial qualifications and 
experience, determine the hierarchical structure in the courts. For 
example, trial committees, which have the ultimate authority in 
determining judgments, are composed of individuals with the most senior 
administrative ranks, rather than the best judicial qualifications.
    Inevitably, the politicization and administrative control of the 
courts corrupts judicial integrity. In public perception, the Chinese 
judiciary is one of the most corrupt government institutions. A survey 
of 12,000 people in 10 provinces commissioned by the CCP's Central 
Discipline and Inspection Commission in late 2003 found that the 
courts, along with the police and the procuratorate, were considered 
among the five most corrupted public institutions (39 percent of the 
respondents said corruption in these three institutions was ``quite 
serious''). Chinese press frequently reports corruption scandals 
involving judges. In Hubei province, from 2002 to mid-2003, 91 judges 
were charged with corruption. The accused included one vice president 
of the provincial high court, two presidents of the intermediate court, 
four vice presidents of the intermediate court, and two presidents of 
the basic-level court. In 2003 alone, 794 judges in the country were 
investigated and punished (chachu). Corruption by senior provincial 
judges was reported in many other jurisdictions. The presidents of the 
provincial high courts in Guangdong and Hunan province were convicted 
of corruption in 2003 and 2004. In Heilongjiang, the president, a vice 
president of the provincial high court, and the head of the provincial 
judicial department were removed from office in late 2004 for 
corruption. In Hainan, a vice president of the provincial high court, 
along with the head of the enforcement department of the court, a vice 
president of an intermediate court, and a president of a district 
court, were sentenced in 2004 to long jail terms for corruption.

    Fragmentation of Judicial Authority: The control by the party and 
local governments of the judiciary has contributed to the fragmentation 
of judicial authority and undermined its effectiveness. In addition to 
the weakening of the judiciary as a result of the CCP's control of 
judicial appointments, the enormous power wielded by local governments 
over the judiciary undercuts the authority of the courts. Because 
judicial jurisdictions and administrative jurisdictions completely 
overlap with one another, the dominance of the administrative 
authorities in effect creates what Chinese observers call judicial 
``independent kingdoms'' in which local political interests, instead of 
national law, hold sway. Under these conditions, laws made by the 
central government cannot be implemented or enforced, leading to the 
widespread problem of ``local protectionism''--the phenomenon of local 
authorities providing political protection to local interests in 
violation of national laws. Consequently, enforcement of court 
judgments is extremely difficult when judicial authority is fragmented. 
In some cases, court judgments could not be executed without the 
explicit political backing from CCP officials. To remedy the structural 
weaknesses caused by such a fragmentation of judicial authority, 
Chinese scholars have offered several proposals for institutional 
reform. These proposals included the establishment of two separate 
judicial systems: a central system and a local system (similar to the 
American federal system), the formation of cross-regional courts, and 
the use of the central government's appropriations to fund courts. 
However, the government has adopted none of them. Such a failure to 
implement crucial reforms led to a growing sense among China's legal 
community that the court system has become so dysfunctional that more 
radical measures--or ``major surgery,'' to use a colorful phrase--would 
be required.
    In summary, the Chinese government's lack of commitment to a 
genuine system of rule of law is the fundamental cause of the 
limitation of legal reform in China. The CCP's goals in allowing legal 
reform are tactical in nature: such reform must serve the party's 
overall strategy of maintaining its political power through economic 
reform. Measures of legal reform must not threaten its authority or the 
institutional structure upon which its political supremacy is based. As 
long as this mindset dominates the party's thinking, legal reform in 
China will unlikely lead to the emergence of the rule of law.

                      III. POLICY RECOMMENDATIONS

    The United States can play a crucial role in promoting the rule of 
law in China. Through high-level political dialogue, financial and 
technical support, and consistent diplomatic pressures, the United 
States government can help create the right incentives for reform 
within China. In the short-term, the Administration must engage China's 
new leadership in the area of legal reform. For example, President Bush 
may use the two upcoming summits with President Hu Jintao to seek 
specific commitments from the Chinese government in the area of 
promoting the rule of law. In particular, pressures on China to take 
specific actions to improve its human rights practices and protection 
of property rights must be combined with offers of technical assistance 
because this strategy will be more credible and less confrontational. 
The United States government should also facilitate and support the 
efforts of American non-governmental organizations that are 
implementing various programs inside. China that are designed to 
promote legal reform. Of course, we must remain realistic about the 
limits of external pressure and assistance. The ultimate choice lies 
with the Chinese government. But, by offering the right mix of 
incentives and disincentives, we may make it more likely that Beijing 
will make the right decision.

    Senator Murkowski.  Thank you, Dr. Pei.
    Mr. Herberg?

  STATEMENT OF MIKE HERBERG, DIRECTOR, ASIAN ENERGY SECURITY 
   PROGRAM, THE NATIONAL BUREAU OF ASIAN RESEARCH, SEATTLE, 
                           WASHINGTON

    Mr. Herberg. Thank you, Madam Chairwoman. It is a pleasure 
and an honor to be here to speak to the committee.
    Energy is getting to be an enormous topic when it comes to 
China. We have already heard some of those questions. I think 
you have to understand what is driving China's energy concerns 
and what is driving China to become a major factor, both in the 
region and globally, in energy markets in key areas of the 
world.
    The efforts come in two ways--trying to secure supplies in 
different places, both in Asia and outside Asia, through equity 
deals and long-term contracts--but also the attempt to control 
transit routes, pipeline routes, tanker routes, as well, those 
are two dimensions of that.
    But I think it is important to keep in mind that China is 
the catalyst in Asia for what we see as a broader Asian 
scramble for energy supplies and what you can call a growing 
``energy nationalism'' in Asia. They are not the only one; 
Japan, South Korea, India, and some others are pursuing the 
same direction.
    In order to understand China's insecurity about its energy 
supplies, and particularly oil supplies, a few statistics will 
help. From 1985 to 1995, oil demand doubled; from 1995 to 2005, 
oil demand doubled again. Imports, today, account for 40 
percent of China's total oil needs, as opposed to zero just 12 
years ago. If we go out in the future, with IEA forecasts or 
DOE forecasts, within 15 or 20 years, China is likely to be 
importing 10 million barrels of oil a day, roughly 75 to 80 
percent of its oil supplies. So, this has really focused the 
mind of the Chinese leadership, this kind of dependence on oil 
imports. Most of this oil has to come from the Persian Gulf. A 
little can come from Central Asia, Russia, and Africa, as well. 
But the majority of that is going to have to come from the 
Persian Gulf, through the Straits of Hormuz, the Straits of 
Malacca, and the South China Sea. This whole threat, or this 
perception, has really impacted the leadership. The fear is 
that oil and energy shortages will undermine economic growth, 
which means undermining job growth, which means undermining 
social stability.
    They have added concerns that I think the U.S. does not 
always appreciate. From the Chinese perspective, the U.S. 
controls the sea lanes of Asia, through which most of China's 
future oil will come, as well as the Indian Ocean. The U.S. is 
a major power in the Persian Gulf and in all the other key oil 
exporting regions of the world. China feels excluded from 
global oil markets and the global oil industry, which it feels 
are controlled largely by the U.S. Geopolitically, the U.S. is 
the power in the Gulf, as well as influences by big 
international oil companies from the Western World. So, China, 
on top of these other concerns, feels that it is excluded from 
the geopolitics of the industry, through which much of its oil 
will come in the future.
    The response has been what we have talked about a little 
bit earlier today--this ``going-out'' strategy--what I call 
``energy diplomacy''--going out, trying to lock up supplies 
throughout Asia, but also in all the key exporting areas--the 
Persian Gulf, Africa, and Central Asia. You have Chinese 
national oil companies in probably 25 to 30 countries right now 
doing equity deals of one sort or another; some of those 
countries, Iran, Sudan, and other places that we are certainly 
concerned about. They are working on developing pipeline routes 
from Kazakhstan, Russia, and possibly through Myanmar, as well 
as trying to bypass their dependence, or at least reduce their 
dependence, on the Straits of Malacca and oil coming from the 
Persian Gulf.
    Aligned with that is the diplomatic backup from the Chinese 
Government, in terms of aid, loans, development assistance, and 
other deals that come along with those energy packages. It is a 
very powerful set of incentives that these countries have to 
work with China on these energy security deals. The corollary 
is that China has really not shown much interest in regional 
cooperation and relying on markets in the region for its energy 
supplies.
    Another troubling aspect of China's efforts is that it 
appears to be affecting their naval and military strategy in 
the South China Sea and Southeast Asia, due to this concern 
over the flow of all these tankers of Chinese oil in the future 
coming through that area. Beijing wants to have some ability to 
influence the maritime traffic in those regions, which means it 
is pursuing submarines and other base access agreements in 
those regions.
    But I think you also have to factor in the other Asian 
powers that are doing many of the same things--Japan, India, 
and South Korea. In a sense, it takes two to tango. There is an 
increasingly nationalistic, contentious, competitive 
environment for energy supplies in Asia, which all the major 
powers are participating in, and this reinforces and overlaps 
the same existing geopolitical rivalries that exist in Asia 
over broader political and geopolitical issues.
    So energy is contributing to those rivalries and 
aggravating those underlying geopolitical rivalries. The other 
side of that is that those geopolitical rivalries are now 
making it more difficult to solve the region's energy problems 
in a collaborative multilateral cooperative way.
    For the U.S., I think it is very important for U.S. 
policymakers to become more engaged in Northeast Asia, 
particularly, regarding the region's energy security worries, 
because, without greater involvement from the U.S., it is going 
to be very difficult for Northeast Asia to solve its 
multilateral energy security problems.
    Thank you.

    [The prepared statement of Mr. Herberg follows:]

                Prepared Statement of Mikkal E. Herberg

    Senator Murkowski, members of the committee, thank you for this 
opportunity to appear before the committee today to discuss China's 
energy situation and the implications for Asia and the U.S. It is an 
honor to be here.
    If I may, a few words about my organization may be helpful. The 
National Bureau of Asian Research (NBR), is a nonprofit, nonpartisan 
research institution dedicated to informing and strengthening policy in 
the Asia-Pacific. NBR conducts advanced research on security and 
globalization issues, with emphasis on those of interest to the United 
States. Drawing upon an extensive network of the world's leading 
specialists and leveraging the latest technology, NBR bridges the 
academic, business, and policy arenas. The institution disseminates its 
research through briefings, publications, conferences, congressional 
testimony, and email fora, and by collaborating with leading 
institutions worldwide. I direct NBR's Asian Energy Security Program 
which focuses on the future geopolitical, economic, energy market, and 
environmental issues raised by Asia's rapidly growing energy 
consumption, growing dependence imported energy, and growing reliance 
on fuels sources which raise other serious problems, such as coal-and 
nuclear energy.
    We believe at NBR that the issues emanating from China's growing 
energy needs are so important that we are organizing a small, 
invitation only conference for this September here in Washington, D.C., 
entitled ``China's Search for Energy Security and Implications for the 
U.S.'' We will have some of the top energy and geopolitical experts in 
attendance to discuss a wide range of issues, including the outlook for 
China's energy needs and energy imports, it is emerging and active 
energy security strategy, the implications for Asia, and the 
implications for the U.S.
    Energy has become central factor in shaping China's deepening 
engagement and diplomatic strategy in Asia and this is virtually 
certain to grow rapidly in the future. Moreover, energy has become a 
central factor in shaping China's global geopolitical and diplomatic 
architecture in key oil and gas exporting countries and regions, such 
as the Persian Gulf, Central Asia, Russia, Africa, and, more recently, 
the Western Hemisphere. China is on a path to becoming a major player 
in the geopolitics of global energy.
    Given the range of vital U.S. political, economic, and energy 
interests in the Asia region and in the world's key energy exporting 
regions, China's energy drive will undoubtedly have important 
implications for the U.S. However, at this point, it is not clear to 
what extent energy, on balance, will become a source of friction and 
tension in U.S.-China relations or, alternatively, a source of future 
cooperation. This will be determined both by China's policies on 
securing its energy security as well as on U.S. policies in response. 
And it will also depend heavily on the overall ``tenor'' of the U.S.-
China relationship in the future, whether overall relations are largely 
cooperative and constructive or, alternatively, competitive and 
contentious. Nor is it pre-ordained that energy will be a source of 
conflict in Asia, although present trends are clearly worrisome. This 
too depends on both Chiria's policies and actions in Asia towards 
securing its future energy needs, as well as the policies and responses 
of other key states in Asia, most importantly Japan, Russia, and South 
Korea. And it will depend on whether Asia manages the rise of China in 
a peaceful and constructive way or China's rise is disruptive and 
destabilizing. At present, energy nationalism is on the rise in Asia 
with ominous implications for Asia's future, In sum, energy and 
strategic relations in the region are becoming increasingly intertwined 
in the wake of Asia and China's booming energy demand and growing 
reliance on imported energy.

                  THE ROOTS OF CHINA'S ENERGY DILEMMA

    First, it is important to understand the underlying context for 
China's growing impact on energy markets and geopolitics. China is now 
the second largest energy consumer in the world, after the U.S. Booming 
energy demand growth is a reflection of its two-plus decades of rapid 
economic and trade growth, urbanization, population growth, and rising 
per-capita incomes. In this it is no different than the rest of 
developing Asia which is also experiencing a period of extraordinary 
energy demand growth reflecting its rapid economic growth and 
industrialization. The primary difference is simply the sheer scale of 
China's energy demand due to the size of its economy and population and 
the peculiarities of China's domestic energy supply base.
    Rapid demand growth is reflected across the fuel spectrum including 
oil, natural gas, electricity, coal, nuclear and hydroelectric 
resources. Large domestic supplies of coal have dominated domestic 
energy use and coal continues to account for two-thirds of total energy 
consumption. However, rapid economic growth has accelerated the pace of 
oil demand growth and the government's decision to expand the use of 
natural gas promises to boost future gas consumption. These 
developments will boost China's future energy import dependence and 
fuel its efforts to secure energy supplies in Asia and globally.
    Oil is a special concern. Oil demand is rapidly outrunning China's 
domestic oil resources leading to rising oil imports which have surged 
over the past several years. China has been Asia's largest oil producer 
since the mid-1960s, in recent years producing roughly 3.5 million 
barrels per day (MMBD). However, oil demand accelerated during the 
economic boom of the 1980s and early 1990s while oil production lagged. 
Demand doubled between 1984 and 1995 from 1.7 million barrels per day 
(MMBD) to 3.4 MMBD and has doubled again to 6.8 MMBD in 2005. China 
became a net importer in 1993 and by 2003 it surpassed Japan to become 
the world's second largest oil consumer behind the U.S and is now the 
third largest oil importer behind the U.S. and Japan. China now imports 
more than 40 percent of its total oil needs.
    China's leadership has responded with both energetic domestic 
reforms and aggressive global energy security policies. Domestically, 
efforts are underway to maintain production in the traditional 
northeastern oilfields while boosting production in western China where 
prospects for growing production are better, the so-called ``stabilize 
the East, develop the West'' policy. Offshore oil development also has 
been a high priority in both the South China Sea and East China Sea, 
although with relatively modest results. The domestic oil industry also 
has been repeatedly restructured to try to boost competition and 
efficiency and oil pricing has been brought more closely in line with 
global and regional oil markets.
    Nevertheless, domestic oil production is unlikely to rise 
significantly in the foreseeable future while there is a widely held 
consensus among energy forecasters that oil demand, and therefore 
imports, are very likely to continue growing relentlessly. The TEA 
forecasts that China's oil imports will rise more than five-fold by 
2030, from slightly under 2 MMBD in 2002 to nearly 11 MMBD, when 
imports will account for 80 percent of China's total oil needs.\1\ The 
leadership now faces the long-term realization that oil import 
dependence is unavoidable and will grow. Moreover, as in the rest of 
Asia, China will become heavily dependent on the Persian Gulf for 
future supplies and its oil will increasingly have to transit a series 
of vulnerable maritime choke points. The East-West Center forecasts 
that by 2015, 70 percent of China's oil imports will come from the 
Middle East. Other significant shares of China's oil imports will come 
from Russia by pipeline and rail, from Central Asia by pipeline, and 
from Africa by tanker.
---------------------------------------------------------------------------
    \1\ International Energy Agency, World Energy Outlook, 2004, OECD, 
Paris.
---------------------------------------------------------------------------
    Electricity demand has also accelerated. in recent years forcing 
the government to scramble to find fuels to generate more electricity. 
Rising electricity demand is the key driver behind China's heavy 
reliance on its largest domestic energy resource, coal. China is the 
largest producer and consumer of coal in the world and coal accounts 
for over 80 percent of electricity generation and accounts for two-
thirds of China's total energy use. Coal consumption is expected to 
double over the 2001-2025 period with truly frightening environmental 
and health implications. China is also expected to account for one-
quarter of the world's CO2 emissions over that period. 
Although presently a modest net coal exporter, it is likely to become a 
net importer of coal as early as 2015.
    The electricity demand boom is also driving plans for the largest 
single country nuclear power building program in the world. China plans 
to build two large nuclear plants per year over the next 20 years. 
Extensive hydroelectric development is planned for the future, as well. 
Policies are also being developed to accelerate the use of renewables, 
such as solar and wind, but these will only make a small dent in the 
electricity demand curve even under the most optimistic of forecasts.
    China is-presently largely self-sufficient in natural gas but this 
is only because it uses so little: gas represents less than 3 percent 
of China's total energy consumption compared with a global average of 
23 percent. However, the government has embarked on an aggressive 
policy to increase gas use to help replace coal to generate 
electricity, diversify overall commercial and household energy use, and 
provide cleaner-burning fuel for environmental needs. Current plans 
call for gas to make up 8-10 percent of total energy demand by 2020. 
The government is accelerating domestic natural gas exploration and 
development and expanding the national pipeline system to transport 
more gas from fields in north central and western China to the major 
cities on or near the east coast. A major 2,500 mile west-east gas 
pipeline has just recently been completed to move natural gas from the 
sparsely populated Xinjiang Uyghur Autonomous Region to Shanghai. The 
government also is working to develop gas markets by creating more 
effective regulatory structures and increasingly flexibility in the gas 
pricing system.
    Over the long-run, although gas is an important element of China's 
overall energy needs and environmental concerns, it also will add to 
dependence on energy imports in the future. Beyond 2010 demand is 
likely to begin to outrun domestic production. China's first gas 
imports will commence in 2007, with the opening of a Liquified-Natural 
Gas (LNG) import terminal in Guangdong Province, with plans for a 
string of LNG terminals along China's booming coastal region. The DOE 
forecasts that imports will account for 40 percent of China's gas needs 
by 2025. LNG supplies will come largely from Asia, including Australia, 
Indonesia, Malaysia, Brunei, and East Timor, but China will also likely 
rely on a growing volume from the Persian Gulf, including Qatar, Iran, 
Oman, and probably Yemen. China is also likely to import gas via 
pipeline from Russia's East Siberian Irkutsk or Sakha regions where a 
large regional gas pipeline scheme is being planned. Consequently, a 
significant portion and will have to be transported largely from the 
same volatile regions as oil imports, namely the Persian Gulf and 
Russia.
    In sum, despite significant efforts to stimulate domestic energy 
production China faces an inevitable trend toward greater energy import 
dependence to fuel its dynamic economic growth. Import dependence will 
be most acute for oil but will become a growing concern over the longer 
term for natural gas supplies. Moreover, electricity needs are driving 
China towards fuel choices with serious environmental, safety, and 
nuclear non-proliferation implications for the region and the U.S.

                   CHINA'S GROWING ENERGY INSECURITY

    China's rapid economic growth is highly dependent on finding the 
growing energy supplies needed to fuel this economic ``Dragon.'' The 
erosion of the ability to rely largely on domestic energy supplies has 
created a powerful sense of energy insecurity rooted in a deep-seated 
fear among the leadership that energy supply disruptions and 
unpredictable price spikes could undermine China's rapid economic 
growth and job creation. To the leadership, slow economic and job 
growth raise the real specter of social instability which, in turn, 
calls into question the continued power and political control of the 
Communist Party. Hence, there is a visceral and profound connection in 
the minds of the leadership between reliable energy supplies, political 
and economic stability, and continued Party control.
    In this context, energy has become a matter of ``high politics'' of 
national security and no longer just the ``low politics'' of domestic 
energy policy. Energy security is too important to be left entirely to 
the markets as China's economic prosperity is increasingly exposed to 
the risks of global supply disruptions, chronic instability in energy 
exporting regions, and the vagaries of global energy geopolitics. 
Energy has become a central concern for Beijing and the global search 
to secure future energy supplies has taken on great urgency.
    The events of 9/11, the Global war on Terrorism, and the wars in 
Afghanistan and Iraq have heightened this sense of insecurity and 
vulnerability. First, China is increasingly concerned about the risks 
of potential terrorist attacks on energy infrastructure and attacks on 
key maritime transit points like the Straits of Malacca.\2\ More 
broadly, from China's perspective, the aggressive U.S. response to the 
attacks on America risk further destabilizing the Persian Gulf and 
Central Asia and increasing the risks of supply disruptions, worsening 
Islamic extremism, and political instability. Moreover, China views the 
U.S. as a long-term strategic competitor meaning that the deeper 
extension of U.S. military power and influence in Central Asia and the 
Persian Gulf aggravates their already significant fears of strategic 
``encirclement'' by the U.S. The U.S. dominates the Persian Gulf, from 
their point of view, and uses this to maintain control over global oil 
supplies and geopolitics. The U.S. navy dominates the Sea Lines of 
Communication (SLOC) in Asia and the Indian Ocean through which a 
growing share of China's oil supply will flow in the future. These 
things aggravate their fears over what they view as U.S. global 
``hegemony'' and increases the sense of vulnerability over oil and gas 
flows vital to China's long-term strategic room to maneuver, its 
economy, and its social stability. Their fears over U.S. control of the 
sea lanes coalesce most clearly in their deep concerns that the U.S. 
would cut off their oil imports during any confrontation with the U.S. 
over Taiwan.
---------------------------------------------------------------------------
    \2\ The two major chokepoints for Asia's supplies are the Straits 
of Hormuz exiting the Persian Gulf and the Malacca Straits between 
Indonesia and Malaysia entering the South China Sea. In 2003 roughly 15 
million barrels of oil per day (MMBD) passed through the Straits of 
Hormuz, with around 10 MMBD of that headed to Asia through the Straits 
of Malacca. Another 1 MMBD passes through the Straits of Malacca from 
Africa. As a result, more than 50 percent of Asia's daily oil supplies 
must transit the narrow Malacca Straits. See ``World Oil Transit 
Chokepoints,'' Energy Information Administration, U.S. Department of 
Energy, April 2004.
---------------------------------------------------------------------------
    A variety of other factors aggravate this sense of insecurity. 
China has a strong sense of exclusion from the global energy management 
institutions, such 'as the TEA, and also sees itself as dependent on 
global oil markets and a global oil industry that. is dominated by the 
U.S and the major international oil companies of the industrial 
countries. Also, high oil prices and a growing fear of long-term global 
oil supply ``scarcity'' are feeding this sense of insecurity and the 
compulsion to try to unilaterally secure its future oil and gas needs 
in Asia and elsewhere by direct state intervention.
    China is responding with a broad range of energy strategies 
internationally to try to guarantee greater supply security and reduce 
their vulnerability to potential supply and price shocks. On balance, 
these efforts reflect a ``zero-sum'' energy supply strategy which is 
deeply neo-mercantilist and competitive. It is built on efforts to gain 
more secure direct national control of overseas oil and gas supplies by 
taking equity stakes in oil and gas fields, promoting the global 
expansion of the three national oil companies, CNPC, Sinopec, and 
CNOOC, and promoting development through state-to-state deals of new 
oil and gas pipelines to channel supplies directly to China. The 
government is also employing an active ``Energy Diplomacy'' by 
developing broader government-to-government diplomatic, trade, 
financial, economic aid, and military ties with key exporter 
governments, promoting energy cross-investments between China and key 
exporters, and beginning to shape its naval and maritime military 
strategy to try to protect the SLOCs from the Persian Gulf and through 
the South China Sea to China. These efforts naturally converge on.the 
Persian Gulf, Central Asia, Russia, Africa, Latin America, and, 
recently, Canada. For example, the Chinese government has signed 
``Strategic Energy Alliances'' with at least eight countries over the 
past five years which include a varying mix of energy, trade, aid, and 
military agreements depending on the case.

                   IMPLICATIONS FOR ASIA AND THE U.S

    China's energy security drive is likely to significantly impact 
Asia and broader global developments in a number of ways which could 
become of concern to the U.S.
    One set of concerns revolves around the growing perception that 
China's booming oil demand and oil imports are driving the recent sharp 
rise in world oil prices and, by implication, that U.S. oil consumers 
are paying the price for China's outsized demand growth. While China's 
oil demand growth, particularly in 2004, when demand rose by 14 
percent, has been a key factor in recent price hikes, it is only one of 
a number of factors. Even in 2004 China only accounted for roughly 30 
percent of the world's enormous demand growth of 2.8 MMBD, about the 
average for China's share of global growth over the past decade. From 
2000-2004, the growth in China's oil imports has been only slightly 
larger than the U.S., 1.5 MMBD vs. 1.3 MMBD for the U.S. Oil demand 
growth has been strong globally since the economic recovery began in 
mid-2003. In the view of many, the most important factor in today's 
high oil prices is the. lack of increases in global oil production 
capacity in recent years to meet rising demand. The lack of global 
spare production capacity is the critical issue. Other issues like the 
lack of spare capacity in the global refining system are also central 
to today's high prices.
    A corollary to this concern is the widespread notion that the U.S. 
is increasingly ``competing'' with China for its oil imports. However, 
this makes little real sense: the U.S. is no more competing with China 
for its oil than it is competing with Germany or any other large oil 
importer. There is only one global oil market and prices and supplies 
equilibrate every nano-second responding to demand, transportation 
costs, and quality differentials.
    Another aspect of this oil competition issue may be of more 
concern. One element of China's mercantilist oil strategy is to gain 
direct state company control over equity oil production in key 
exporting countries to ship directly to China rather than moving it 
into the global market, as most international oil companies would do. 
To the extent China succeeds in the future in turning certain countries 
into their own personal ``gas stations,'' it risks reducing the 
flexibility of global oil markets to adjust to sudden supply shocks or 
demand surges. The industrial world learned during the 1973-74 oil 
shock that a zero-sum scramble for oil supplies during a crisis simply 
worsens the problem by reducing market flexibility and efficiency and 
intensifying national conflicts over supplies. This led to the creation 
of the IEA to avoid the risks of national competition for supplies that 
only drive prices higher and accentuate scarcity. U.S. policy since 
then has focused on promoting diversified sources of oil supplies to 
flow to the global market, letting the market determine the most 
efficient allocation of those supplies.
    A second set of important concerns over China's energy security 
strategy revolve around the potential impact on Asian geopolitics and 
stability. China's increasingly mercantilist strategy to assert control 
of oil and natural gas supplies and transport routes risks fueling 
tensions and conflict in a region where the lack of regional 
institutions to manage conflict is already a major problem and a region 
which is facing a sensitive transition to accommodate China's rising 
power over the next two decades. Energy competition is beginning to 
seriously aggravate existing and, in some cases, deepening rivalries 
between China and her neighbors. For example, China and Japan are 
currently locked in long-running and potentially highly combustible 
diplomatic battles over the routing of a proposed East Siberian oil 
pipeline that would move oil to Asia, and the ownership of a small 
offshore natural gas field in the East China Sea between China and 
Japan. These disputes are combining with other political and diplomatic 
disputes between the two to sharply worsen the overall state of 
relations. Nevertheless, this is not just China's problem alone. A 
virulent form of energy nationalism is taking form in Asia today that 
threatens to aggravate Asia's underlying national rivalries. Each of 
the major Asian states, China, Japan, India, South Korea, and 
increasingly some of the Southeast Asian states, are pursuing a largely 
mercantilist, nationalistic, competitive approach to securing future 
energy supplies and transit routes. This is preventing development of 
more cooperative and market-oriented approaches to the region's common 
energy security problems. The United States has major strategic and 
economic stakes in how China responds to its energy insecurity and how 
this impacts Asian stability and geopolitics.
    Another dimension of China's energy insecurity that is of concern 
to Asia and the U.S. is its impact on China's military and naval 
strategy. The growing volume of oil that will be flowing to China by 
tanker through the Indian Ocean and South China Sea appears to be 
driving efforts to develop naval capabilities and arrangements that 
would allow it to project its impact well beyond the Taiwan Strait. 
China has been developing a major submarine capability and potential 
port access agreements with Pakistan, Bangladesh, Myanmar, and the 
South China Sea which appear aimed at protecting future Chinese oil 
tanker routes. In this sense, China's energy insecurity risks 
aggravating the potential future problem of military maritime 
competition to control the Sea Lines of Communication in Southeast 
Asia.
    A third area of real concern for the U.S. beyond Asia comes from 
the fact that energy needs inevitably will propel China to become a 
major player in the world's key oil and gas exporting regions and in 
global energy geopolitics. There are a series of issues here. The most 
immediate concern is China's growing energy investments and alliances 
with a number of problem states, including Sudan, Iran, Myanmar, 
Venezuela, and Uzbekistan. In the case of Sudan and Iran, China's 
involvement is helping to undermine U.S. sanctions (although China is 
among a number of countries doing so) and is also complicating U.S. 
efforts in the United Nations. For example, China is the prime 
roadblock to taking Iran to the Security Council for sanctions over its 
nuclear program. Efforts to sanction Sudan for its human rights 
violations in the Darfur region are also stymied by China's opposition. 
Sudan happens to be China's largest foreign oil investment operation. 
China is on its way to greater involvement in Myanmar, recently signed 
a major energy investment deal with Uzbekistan, and has signed a 
Strategic Energy Alliance with Hugo Chavez and Venezuela.
    A second set of issues is likely to arise from what inevitably will 
be China's greater diplomatic and political involvement in. the Persian 
Gulf and Middle East in the future. China will become a major 
competitor for political influence in the Persian Gulf and the U.S. 
will increasingly need to come to grips with growing diplomatic and 
political ties between the key Gulf states and China, particularly 
Iran, where China is increasingly active. For their part, the key Gulf 
states are increasingly turning to growing diplomatic ties with Asia 
and China as their base of oil exports to Asia grows. Already, nearly 
two-thirds of the Gulf's oil exports go to Asia and this share will 
grow. The Gulf states are increasingly looking to balance their ties to 
the U.S. with ties to China. As the traditionally dominant outside 
power in the Gulf, the U.S. will find its regional diplomacy becoming 
even more complex.
    Similar issues are likely to arise in relation to Eurasia as China 
deepens its long-term energy ties with Russia and the energy exporting 
Central Asian states. China's push to develop the Shanghai Cooperation 
Organization bringing together the key states of Eurasia is in no small 
part driven by its desire to forge stronger energy ties and more secure 
future supplies, particularly from Kazakhstan. China has major oil 
investments in Kazakhstan and is currently building a large oil 
pipeline from Kazakhstan to western China.
    China's energy needs, along with the rest of the large Asian oil 
and gas importers, are also inexorably drawing Russia back into Asia as 
a key strategic and commercial player with a range of potentially 
important implications for U.S. interests in Asia and for future U.S. 
relations with Russia. Energy has the potential to strengthen long-term 
ties between China and Russia. However, this has not really happened 
yet due largely to Russian fears over China's growing regional power 
and fears that Russia's Far East region may be overrun in the future by 
Chinese economic power, influence, and population growth. Consequently, 
despite a series of strategic energy agreements between the two 
countries, Russia has largely frustrated China's efforts to forge major 
new energy deals and diplomatic ties. The most obvious case of this was 
Russia's announcement that it would build the planned East Siberian oil 
pipeline to the Pacific Coast where it would export oil to Japan and 
the rest of Asia, rather than live up to its previous agreement with 
China to build the pipeline to Northeastern China.
    A fourth set of concerns over China's growing electricity needs 
arises from the environmental and nuclear safety and proliferation 
issues coming from China's rising consumption of coal and its major 
nuclear energy building program. China's coal consumption is expected 
to roughly double over the next 15 years. This raises a range of 
serious environmental and health concerns not just for China but for 
the region and the U.S. Acid rain from China's coal burning is already 
a major problem in Northeast Asia causing diplomatic tensions with 
Japan and South Korea. From the U.S. perspective, there is already 
evidence of mercury from China's coal burning being drafted by the 
jetstream all the way to North America. As coal consumption grows, 
these concerns are likely to rise. Moreover, rising coal consumption 
along with booming oil consumption will make China the largest source 
of carbon dioxide emissions globally in the future which raises serious 
concerns about the effectiveness of any global effort to deal with 
controlling carbon emissions.

                       POLICY ISSUES FOR THE U.S.

    China's booming energy demand and growing energy insecurity are 
likely to deeply impact China's role in Asia and globally, with some of 
these impacts having serious implications, for Asia and the U.S.
    There are several general policy areas that U.S. policymakers need 
to begin thinking about. First, U.S. policymakers need to step up 
efforts to help China improve energy efficiency and slow the rise in 
consumption which is underlying China's insecurity. This needs to 
proceed at the highest level. Second, the U.S. needs to look for ways 
to bring China into the global emergency oil sharing system currently 
dominated by the IEA, which, since it can only include members of the 
OECD, by definition excludes China. This again requires a senior policy 
level effort. China is presently beginning to build its own strategic 
oil reserves in four locations along the eastern coast, But it is vital 
that its efforts to build and use strategic reserves be coordinated 
with IEA and western strategic reserves to maximize their effectiveness 
during any supply crisis. Third, the U.S. needs to aggressively seek 
ways to build regional energy institutions in Asia to facilitate 
multilateral energy projects and encourage regional cooperation over 
competition. APEC is not an effective forum for this, nor is the ASEAN 
Regional Forum (ARF). New institutions need to be built and the U.S. 
needs to be involved in this. Without U.S. involvement, the risks are 
rising that nationalistic competition for energy supplies and naval 
control over transit routes could lead to serious political and 
military tensions among Asia's key powers. Fourth, U.S. policymakers 
need to begin planning for managing and channeling China's growing 
diplomatic and economic influence in the world's key energy exporting 
regions, most importantly the Persian Gulf and Middle East. Fifth, the 
U.S. needs to become more active in helping China find alternatives to 
rising coal consumption to meet its electricity needs and to support 
technology and investment to help China burn coal more efficiently and 
cleanly.
    China's booming energy consumption will drive a number of important 
energy, environmental, and diplomatic challenges in the future for Asia 
and for the U.S. It is vital that U.S. policymakers at the highest 
level begin to engage China on these issues and seek creative ways to 
avoid a growing set of looming challenges outlined here.

    Senator Murkowski.  Thank you.
    Dr. Dalpino?

    STATEMENT OF CATHARIN E. DALPINO, ADJUNCT PROFESSOR OF 
  SOUTHEAST ASIAN STUDIES, EDMUND A. WALSH SCHOOL OF FOREIGN 
      SERVICE, GEORGETOWN UNIVERSITY, SCHOOL OF ADVANCED 
 INTERNATIONAL STUDIES, JOHNS HOPKINS UNIVERSITY, WASHINGTON, 
                              D.C.

    Professor Dalpino. Thank you, Madam Chair.
    I am here to speak on the Southeast Asia part of this 
puzzle. In the past 15 years, China has made dramatic strides 
in increasing its influence and presence in the region, and, as 
you noted in your introductory remarks, this is, in part, 
because of the natural consequences of its economic rise, and 
also because of very carefully crafted strategies.
    In 2005, it is quite possible that ASEAN's trade with China 
will eclipse its trade with the United States, and China will, 
for the first time, be the major economic power in the region, 
the first time since 1873. This, alone, might not necessarily 
be a cause for concern, but I think there are two issues that, 
really, we need to look at in China's new relationship with 
Southeast Asia.
    First is whether, in outdistancing the United States as an 
economic power, as China might, there might be a gravitational 
pull towards an Asian economic community that would exclude the 
United States. And this would not simply be a function of 
Chinese/Southeast Asian relations, but of the broader region. 
And, second would be China's overwhelming influence in the 
poorer states of Southeast Asia--and those would be Laos, 
Burma, and Cambodia--and whether we should cede those countries 
to China as client states.
    Both countries, China and the United States, have 
considerable strengths and considerable presence in the region. 
Certainly, the United States security umbrella is very 
important, and I would argue it is even important to China's 
development in Southeast Asia. It allows it to have the kind of 
relationship that it does have. Our markets are also very 
important. Most of the exports that Southeast Asia sends to 
China are raw goods. Most of the exports it sends to the United 
States, besides textiles, are in high-tech manufactured goods. 
And so, we are going to remain an important market.
    China's aims in its economic strategy towards Southeast 
Asia are primarily to fuel development, particularly of the 
southern province of Yunnan. And, in that sense, it needs 
energy, it needs raw goods. It is a pressure valve for 
migration. There is considerable migration into the northern 
states of Southeast Asia. China is changing the physical face 
of Southeast Asia through road-building and also through its 
dams on the Mekong, and it is blasting the shoals of the Mekong 
to widen it for barges to go through.
    Southeast Asia's aims in this new economic relationship are 
to recoup much of the income, or some of the income, that it is 
losing to China--in part, as a result of China's entry into the 
WTO. Some economists believe that, over the next 15 years, 
Southeast Asia can lose as much as 400 billion in FDI to China. 
And so, the increase in trade obviously is very strategic on 
Southeast Asia's part.
    China's ultimate intentions in Southeast Asia are unclear. 
And most Southeast Asian governments tend not to see China as a 
predator at this point, tend to see it as a benign power, at 
least for the time being. The stronger, older states of ASEAN--
Thailand, Indonesia, Singapore, and Malaysia--are confident 
that they can balance relations between China and the United 
States. The Philippines is still very close to the United 
States. Our treaty ally is embarked upon a new strategic 
dialogue with China, it is a process of re-balancing, but I do 
not think that we have a lot to worry about in that.
    Because of its history, Vietnam is pursing an 
omnidirectional foreign policy. It aims to have relations with 
all the world's powers. It maintains that it is not seeking a 
counterweight of one against the other. And, as I said before, 
the real imbalance is in these poorer states.
    In terms of security, China has been slower to develop 
relations with Southeast Asia, but recently it has improved in 
reduced tensions in the South China Sea. It is an arms vendor. 
Malaysia and China recently concluded an agreement for midrange 
missiles. And, also, it is taking a role in regional security. 
It chaired the first security conference of the ASEAN regional 
forum last year.
    Let me just point out two strategies China has. And one is 
to offer absolutely unconditional aid to Southeast Asia, in 
comparison to United States aid. And last year the United 
States had sanctions against seven out of ten Southeast Asian 
countries, or the threat of them. And this--certainly the 
countries took note.
    The second is that China takes a more regional approach to 
Southeast Asia than the United States does. It interacts more 
with ASEAN. And the greatest example of this is the ASEAN/China 
free trade area, which is--only exists in principle at this 
point, but, if it comes to fruition by 2015, will be the 
largest free trade area in the world.
    There are, I think, numerous things that the United States 
can do to protect our interests and to make sure that our 
influence is safeguarded.
    First of all, we can, through our own trade policies, 
participate more in regional integration in Southeast Asia, 
because that will keep us in the mix. And that would mean 
either stepping up the enterprise for ASEAN initiative or 
perhaps pushing more on the Doha round, which would have an 
integrative effect, but not divert trade as much as bilateral 
FTAs would.
    We should help Southeast Asians think about the next 
financial crisis, and perhaps offer a second line of defense 
for currency--severe currency fluctuations. On a bilateral 
basis, we were not particularly well loved during the 1997-98 
crisis, because we put most of our support through the IMF.
    In terms of security, I think that we could be more active 
in ARF, as well. We tend to have APEC as our go-to regional 
institution. I do not think we want to cede that sort of a role 
to China, although both China and the United States are just 
dialogue partners in ARF.
    I think we can also promote triangular cooperation on 
nontraditional security threats between China and the United 
States and Southeast Asia--epidemics, trafficking of all 
sorts--which would signal that we do see China as a potentially 
benign power, but also set up some tracks for cooperation.
    We can also pursue our own very cautious and incremental 
policy in multilateralizing security in the region. And that 
has taken place mostly through our broadening the Cobra Gold 
exercises in Thailand. And I would note that China has been an 
observer to those exercises.
    I think it is important that we not exacerbate the gap 
between the rich and poor countries in Southeast Asia, and that 
we do improve our ties with the newer members of ASEAN. And 
there are any number of things that we can do in that regard.
    The Tariff Relief Assistance for Developing Economies Act, 
which is before both the Senate and the House for consideration 
this year, would boost trade with Cambodia and Laos, and it 
would help cushion some of the blow of the abolition of the 
textile quotas.
    I do believe, with Vietnam, it is important to solve the 
political issue of Agent Orange. That is one that the 
Vietnamese care very much about, and we have not really given 
it sufficient attention.
    And I think that by national public/private educational 
foundations with Laos and Cambodia, we do quite a lot, as well. 
Education is, as you noted, an increasing problem. There is an 
educational pull towards China. In 2004, twice the number of 
Indonesians got visas to study in China as got visas to study 
in the United States. And so, that is going to be an increasing 
problem that we should think about, seeing education as a 
quote/unquote ``hard'' area of policy, rather than a soft one, 
as it traditionally is.
    And, lastly, I think we need to be careful not to over-rely 
on surrogates in Southeast Asia. We tend to view Japan, 
Australia, and perhaps even India as carrying our water in the 
region at times. I think that would be a mistake. All of those 
countries have a great deal of commonality with the United 
States on some issues, not on some others, but we really do 
need to maintain our own profile in the region through high-
level visits, both in the executive and the congressional 
sides.
    And I would just point out that we recently had a meeting 
in Bangkok on U.S. policy in Southeast Asia, and one of the 
points that was made by some of the Southeast Asian leaders is, 
they would like to see more Senators in the region come out on 
CODELs.

    [The prepared statement of Professor Dalpino follows:]

                Prepared Statement of Catharin E. Dalpino

    Thank you for this invitation to appear before the committee to 
discuss China's emergence in Asia and its impact on U.S. relations with 
Southeast Asia. My views on this subject are informed by my work as an 
adjunct professor of Southeast Asian politics, security and 
international relations at Georgetown University and The George 
Washington University. In addition, I co-edit the Georgetown Southeast 
Asia Survey; direct the Stanley Foundation's project on ``Southeast 
Asia in the 21st Century,'' and consult with the Fund for 
Reconciliation and Development, which work in the countries formerly 
known as Indochina. Some of the findings and recommendations in this 
statement are derived from research conducted by these groups related 
to China's role in Southeast Asia.
    Without doubt, China has increased its reach and influence in 
Southeast Asia dramatically y in the past fifteen years. This is an 
inevitable consequence of its emergence as a global economic power, but 
is also the result of carefully crafted Chinese policies which couple 
geopolitical interests with economic incentives and opportunities in 
Southeast Asia, bound together by a vigorous diplomatic campaign. It is 
a matter of genuine debate whether China's new role in Southeast Asia 
supports or threatens American interests in Southeast Asia. The United 
States wants Southeast Asia to be prosperous and stable, and that 
requires China's active involvement in the region.
    The issue is whether China is on a trajectory to outdistance the 
United States in the region's economic affairs, as well as in political 
and security relations with specific countries. Southeast Asia's trade 
with China is its fastest growing economic relationship, and in 2005 
the volume of ASEAN-China trade may eclipse that with the United 
States. This will make China Southeast Asia's most important trading 
partner for the first time since 1573. Indeed, some economists believe 
that this is the restoration of a very old pattern of Asian economics 
and trade, with China reclaiming the central role it held before the 
colonial era.
    China's ultimate intentions toward Southeast Asia are unclear. Many 
Southeast Asians dissent from a predatory view of China's new 
relationship with the region. The public posture of ASEAN governments 
is to express confidence that China's intentions are benign, and that 
it will over time prove to be a responsible power in the region. They 
do not credit the present generation of Chinese leadership with either 
the ability or the inclination to pursue broad, strategic aims in the 
region in a deliberate fashion. There is considerable evidence to 
support this view at the present time. The exception to this is China's 
relationship with Burma. ASEAN's apprehension over growing security 
ties between Beijing and Rangoon contributed to its decision to admit 
Burma into ASEAN in 1997, in the face of strong resistance from the 
United States.
    More to the point, Southeast Asian as a whole does not want to be 
the object of competition between the United States and China. The 
larger and richer states in the region--Indonesia, Thailand, Singapore, 
and Malaysia--will be able to balance relations between the two 
countries well into the future. Because of its history, Vietnam has 
taken a particularly studied approach to developing relations with 
global and regional powers. Hanoi seeks an omni-directional foreign 
policy and it is adamant that it is note attempting to use one power as 
a ``counterweight'' against another. Relations between the U.S. and the 
Philippines, a treaty ally, have strengthened measurably since the 
September 11 attacks, at the same time, Philippine-Chinese relations 
have also expanded. Late last year the Philippines entered into a 
``strategic dialogue'' with China when President Arroyo made her first 
state visit to Beijing. If there is an obvious imbalance, it is in 
China's relations with the poorer countries of mainland Southeast Asia. 
In recent years Beijing has quickly established itself as the primary 
economic patron in Burma, Laos and Cambodia, and as Rangoon's closest 
political partner.
    The United States and China bring different strengths to their 
relations with Southeast Asia. Although China has improved security 
relations with Southeast Asia, it cannot supplant the United States as 
the security guarantor for the region. The tsunami relief effort 
demonstrated the rapid response capability of the U.S. military, and 
U.S. economic aid to the region was ten times larger than China's 
contribution. However, it would be a mistake to view the tsunami effort 
through the lens of triumphalism. China's role in the relief 
represented its first major international humanitarian effort, and 
Beijing received credit from Southeast Asia accordingly.
    Beyond its market for exports, China has location on its side. Its 
proximity to Southeast Asia enables Beijing to dispatch an ``A team'' 
of leaden to the region on short notice. Diplomatically, Premier Wen 
Jiabao holds the ASEAN portfolio. Moreover, ethnic Chinese in Southeast 
Asia, whose numbers are vaguely estimated at 20 to 40 million, have 
helped open economic and political doors with China for their adopted 
countries, China also has cultural roots in common with many Southeast 
Asian societies, which extend to popular culture in the present day. In 
many younger generation Southeast Asians, kung fu easily tops hip hop. 
These factors combine in Chinese policy to stress the ``family'' 
aspects of China's relations with Southeast Asia, which the United 
States cannot as easily claim.

                        THE CENTRALITY OF TRADE

    Questions of immediate and serious competition with China in 
Southeast Asia pertain to trade. Although the United States has made 
considerable strides in trade with Southeast Asia in recent years, 
China has pulled ahead much more quickly. The underlying issue is 
whether such a pattern represents a gravitational pull toward an Asian 
economic community that excludes the United States. This is underscored 
by China's agreement with ASEAN to form a regional Free Trade Area by 
2015. While still in the early stages, if it is completed the China-
ASEAN FTA would be the world's largest free trade area.
    To be sure, ASEAN has strong interests in maintaining high levels 
of trade with the United States. Most Southeast Asian exports to China 
are in raw materials, while the U.S. is the established market for more 
high tech manufactured goods. Moreover, the United States is 
theoretically working toward a concert of free trade agreements in the 
region through the U.S. Enterprise for ASEAN Initiative, a ladder of 
steps intended to culminate in FTA's with each Southeast Asian country. 
However, these ladders are too steep for the weaker economies of the 
region, and FTA's with the U.S. are not tangible possibilities.
    China's primary goal in its trade with Southeast Asia is to use the 
region's natural resources and markets to fuel domestic Chinese 
development, particularly in the southern province of Yunnan, which 
borders Southeast Asia. In Burma and Laos in particular, much trade is 
private and local and therefore likely to be underreported. Migration 
into these countries accompanies the increase in trade, particularly in 
the northern half of Burma, which some analysts have dubbed ``Yunnan 
South.'' Chinese trade is also changing the physical face of mainland 
Southeast Asia, as roads are built in Laos to connect China to 
Thailand, and as China builds dams on the Mekong for energy and widens 
the river's shoals to permit barges to pass through. Southeast Asian 
NGO's and some governments are beginning to question the ecological 
costs of this process, but have few levers against Beijing to control 
it.
    For its part, Southeast Asia views increased trade with China as an 
opportunity to recycle some of the trade and foreign direct investment 
the region has lost to the economic giant to the north, especially 
after China entered the world Trade Organization. Some analysts 
forecast that Southeast Asia could lose as much as $400 billion to 
China, over the next 15 years. It is unlikely that the proposed China-
ASEAN FTA will stem that loss to a great degree, indeed, there are 
likely to be economic dislocations that come with economic integration 
with China. Beijing has set 2010 as the target date for the reduction 
of tariffs with the original six ASEAN states, and 2015 for the four 
new members. However, early experience is showing that Chinese goods 
can overwhelm indigenous products in Southeast Asian markets. In 
Thailand, as the result of an agreement with China on fruits and 
vegetables, a kilo of Chinese garlic costs 5 baht (15 cents), versus 35 
baht ($1.05) for a kilo of Thai garlic.

                    SECURITY SHIFTS BELOW THE RADAR

    China's intentions toward Southeast Asia appear to be 
overwhelmingly commercial at this time. However, this does not negate 
an increased interest in security in the region. Chinese leaders view a 
stable external environment as essential to achieving their internal 
economic and political objectives. In that regard, Beijing has 
attempted to project the image of a responsible power in Southeast 
Asia, and has taken steps in recent years to reduce tensions over the 
Spratly Islands in the South China Sea. Improved security with 
Southeast Asia also facilitates trade with the region, although greater 
dependence on Southeast Asia's energy and raw materials also creates a 
greater security imperative for China.
    Beijing has been slower to improve security relations with 
Southeast Asia than diplomatic or trade ties. In 1992, after the 
withdrawal of U.S. bases from the Philippines, China issued a 
unilateral claim of sovereignty over the South China Sea. This policy 
resulted in a clash with the Philippines over Mischief Reef in the 
Spratlys in 1995. The incident was a red flag to both China and ASEAN 
that tensions over the Spratlys could derail broader progress in 
relations. In 2002, China and ASEAN negotiated a Declaration on the 
Conduct of Parties on the South China Sea, which called for greater 
consultative mechanisms. The Declaration had echoes of Chinese rivalry 
with the United States, however, when Beijing tried unsuccessfully to 
get ASEAN to agree to forbid foreign military exercises in the region. 
In the past year, Beijing has further reduced tensions by inviting 
Vietnam and the Philippines to join it in exploration of oil resources 
on some of the disputed Spratlys, although such cooperation did not 
include the renunciation of competing claims.
    More generally, Beijing has recently been forward-leaning in 
regional security. In November 2004 China hosted first the Security 
Policy Conference of the ASEAN Regional Forum (ARP), attended by 
defense officials from twenty-four Asian countries.
    Not surprisingly, China also presses Southeast Asian governments to 
purchase military equipment. Although some Southeast Asian defense 
communities see Russian equipment as the alternative to American, China 
has realized some success. Last year Beijing and Kuala Lumpur 
negotiated a deal for Malaysia to purchase mid-range missiles from 
China.
    Southeast Asians are very frank in making clear their views that 
they do not fear a unilateral security threat from China, but they do 
fear the inherent threat in a military conflict between China and the 
United States, which they presume would occur over Taiwan. All of the 
Southeast Asian states follow a ``one China'' policy, although Taiwan 
has significant investments in the region, particularly in labor-
intensive sectors. Southeast Asia occasionally feels the edge of this 
threat. For example, last year Beijing sharply rebuked Singapore when 
then-Deputy Prime Minister Lee Hsien Loong made an unofficial visit to 
Taiwan.

        CHINA'S ``CHARM OFFENSIVE'' AND THE IMPORTANCE OF OPTICS

    At a time when the United States worries about its image abroad, 
particularly in the Muslim world, China has mounted a wing diplomatic 
campaign in Southeast Asia. The primary purpose of this was to 
normalize relations with the ten countries of the region, which Beijing 
has accomplished, although there are significant differences among the 
ten in closeness to Beijing and levels of trust.
    Although China and the United States are not in open strategic 
competition with one another in Southeast Asia, China has learned to 
capitalize on openings the U.S. has left in the region. In 1997, when 
the U.S. failed to offer bilateral bail-outs to Southeast Asian 
countries hit hardest by the economic crisis, Beijing offered those 
states the first Chinese bilateral loans in the region. In 2003, after 
the United States tightened sanctions against Burma in the wake of Aung 
San Su Kyi's rearrest, Beijing gave Rangoon a grant of $200 million to 
help cushion the economic loss.
    Beijing employs two additional strategies that occasionally give it 
advantage over the United States. Chinese aid to Southeast Asia is 
conspicuously unconditional. This creates a contrast to perceptions of 
American aid, which are often entangled with sanctions and other 
conditionalities. In 2004, seven out of ten Southeast Asian countries 
were under U.S. sanctions or the threat of sanctions. Indeed, there 
were signs of a revival of the ``Asian values'' debate of the 1990's, 
when Beijing successfully lobbied to include Burma in the Asia-Europe 
Meeting last year, against the objection of some EU governments.
    Another advantage is Beijing's regional approach to Southeast Asia. 
Although China has been scrupulous in developing bilateral ties, it 
also deals with ASEAN as a regional group to a greater degree than does 
the United States. This is seen not only in the China-ASEAN FTA, but 
also in Beijing's accession to the Treaty of Amity and Cooperation 
(TAC), one of the founding ASEAN treaties. Japan, India and Russia have 
also signed the TAC, and ASEAN has urged the United States to do so as 
well.
    By contrast, the United States is viewed in Southeast Asia as being 
overly bilateral, and at times unilateral, and therefore less 
supportive of ASEAN's development as a regional institution. In the 
near-term, the United States would be constrained in its efforts to 
work more closely with ASEAN as a group, because of political relations 
with Burma. Current U.S. policy toward Southeast Asia tends to 
bifurcate the region into countries with significant Muslim populations 
(and higher terrorism threats as a result), and those without them, 
paying greater attention to the former group. This split corresponds to 
the division between ``old'' and ``new'' members in ASEAN. As well, the 
U.S. Enterprise for ASEAN Initiative favors the older members over the 
new, and it can be argued that it exacerbates the economic gap between 
these two groups as a result.
    The fruits of China's diplomatic efforts in Southeast Asia are 
increasingly evident. Chinese tourism in the region is ballooning. Each 
year, for example, 800,000 Chinese visit Singapore. Equally important, 
educational patterns are changing rapidly to favor China over the 
United States in some countries. Based on the number of student visas 
granted, Chinese educational exchange with Indonesia appeared to have 
increased by 51 percent in 2004 over the previous year. The number of 
Indonesian students receiving visas for China (2,563) was more than 
twice the number granted visas to study in the United States that year 
(1,333). This follows a larger pattern of plummeting levels of foreign 
students, Southeast Asian students in particular, studying in the U.S. 
In the 1980's, Malaysia sent more students to the U.S. than any other 
country, at present, Malaysian students do not make it into the top ten 
groups. According to the Institute for International Education, the 
number of international students enrolled in higher education in the 
United States was down by 2.4 percent for 2003-2004, the first absolute 
decline in foreign enrollments since 1971-72. However, the top two 
groups of Southeast Asian students studying in the U.S.--from Thailand 
and Indonesia--have declined by more than 20 percent each, Many go to 
Australia, which is establishing itself as a regional educational hub, 
but the trends toward China are also dramatic.

                    RECOMMENDATIONS FOR U.S. POLICY

    If the United States frames its policy in Southeast Asia as a zero-
sum competition with China, that will surely become a self-fulfilling 
prophecy. However, the U.S. needs to pay attention to widening gaps in 
economic and political influence in the region that could, over the 
long-term, create serious imbalances. For the most part, safeguarding 
American interests in Southeast Asia does not require a reversal of 
current policies; instead, it is a matter of expanding or accelerating 
existing measures in diplomacy, security, trade and educational and 
cultural exchange.

Economics and Trade
          1. Although a comprehensive U.S.-ASEAN Free Trade Agreement 
        is unlikely in the near term, the United States should support 
        economic integration in Southeast Asia by accelerating U.S. 
        trade policies in the region.

    Participating more fully in Southeast Asia's economic integration 
will help prevent the marginalization of the American role at a future 
time. In this regard, the U.S. could pursue two paths. One would be to 
push for the conclusion of the Doha Development Round by 2005 or 2006, 
which would aid integration while it helps to reduce the potential for 
trade diversion due to bilateral agreements. The second would be to 
accelerate movement on the Enterprise for ASEAN Initiative, and attempt 
to ensure that the agreements it produces are compatible with one 
another, as well as with the FTA concluded with Australia and a 
potential FTA with South Korea.

          2. The U.S. should support Southeast Asia in developing the 
        financial infrastructure to avert or minimize the next economic 
        crisis.

    Southeast Asian leaders fear that sharp economic change in either 
the United States or China could spark an economic crisis in the 
region, and even that U.S. attempts to persuade China to revalue the 
renimnbi could create dislocations in Southeast Asian economies. China 
pays increasing attention to such worries and has made loans to prop up 
Southeast Asian currencies in the poorer countries, often writing off 
the loans. U.S. policymakers should consider support to plans for 
regional currency swaps to stabilize capital flows, such as the Chiang 
Mai Initiative, and consider offering a second line of defense if signs 
of an impending crisis appear. Apart from the benefit to the US 
economic stake in the region, such cooperation could help dispel 
lingering bitterness toward the United States over the 1997 crisis.
Security

          3. The United States should continue cautious multi-
        lateralization of its security policy in Southeast Asia, 
        tailored to Southeast Asian interests and needs.

    This does not necessarily mean the demise of the hub-and-spokes 
configuration of the American security umbrella in Asia. Rather, it 
blunts the edge of military competition in the region while maintaining 
a central role for the United States. The most concrete example of this 
is the incremental expansion of the Cobra Gold exercises. This year 
Japanese Self-Defense Forces joined the United States, Thailand and 
Singapore as participants, and a wide range of countries were 
observers. It is worth noting that China has been one such observer.

          4. The U.S. should take a more active approach to the ASEAN 
        Regional Forum.

    China is carving out a leadership role in ARP, albeit as a 
``dialogue'' partner, while the United States tends to focus more on 
AMC. Because ARF follows ASEAN rules of consensus, it is likely to 
remain a ``talk shop'' for the time being. However, those same rules 
help to reduce national sensitivities. In due course, ARF may be an 
appropriate vehicle to promote cooperation on maritime security.

          5. Washington should consider triangular cooperation--with 
        Southeast Asia, the United States and China--to address 
        transnational threats in the region.

    Beyond the obvious benefits of cooperation in such areas as 
epidemics (avian flu, HIV/AIDS) and transnational crime (human and drug 
trafficking), triangular efforts can help reduce underlying tensions 
about competing military exercises. Cooperation on non-military, non-
traditional threats would be a tangible indication that the United 
States views China as a potential security partner in Southeast Asia, 
rather than a strategic rival.

Diplomacy and Development
          6. The United States should consider new mechanisms to step 
        up dialogue with ASEAN as a group.

    There is little likelihood that the U.S. will sign the Treaty of 
Amity and Cooperation with ASEAN, not least because doing so implies an 
endorsement of the ``Zone of Peace, Freedom and Neutrality'' (ZOPFAN), 
which Washington has long opposed. However, the U.S can consider two 
mechanisms to strengthen ties with ASEAN as a regional institution;
    The first is a regular U.S.-ASEAN Summit, perhaps on the margins of 
the annual APEC meeting. Obviously, the problem of Burma's 
participation would have to be resolved in such a meeting. A second 
measure is the establishment of a U.S. Ambassador at large to ASEAN, 
similar to American envoys to the European Union, the Organization of 
American States, and APEC. However, the appointment of an ambassador 
would need to be matched with the resources to expand and strengthen 
the regional office of the State Department's Bureau of East Asian 
Pacific Affairs.

          7. The United States should help develop human capital in 
        Southeast Asia by expanding programs to strengthen educational 
        ties.

    Education is often a ``soft'' area in foreign affairs. In the case 
of Southeast Asia, however, it is very much a ``hard'' area of policy, 
albeit a long-term and potentially expensive one. Strengthening 
education will boost the region's economic competitiveness, address 
some socioeconomic ``root causes'' of extremism and terrorism; and 
improve ties between the United States and Southeast Asia at the 
societal level. In several Southeast Asian countries, particularly the 
poorer ones, more than half the population was born after 1975, when 
U.S. presence in the region began to recede.
    Educational programs promised for Indonesia and the Philippines 
when President Bush visited those countries in 2003 have been slow to 
come to fruition. These should be expedited. More broadly, beyond 
increasing funds for in-country education and U.S. scholarships, 
policymakers need to address the visa problems which discourage 
Southeast Asian students from study in the United States.

          8. U S. policymakers should avoid exacerbating the gap 
        between ``old'' and ``new'' ASEAN members and offer initiatives 
        to increase American influence in the ``new'' a states.

    Taking steps to strengthen economic integration in Southeast Asia 
would go far in helping to close this gap. However, additional 
political and cultural measures can help shore up U.S. bilateral ties 
with these poorer countries. Some possibilities include:

   Approving the Tariff Relief Assistance for Developing 
        Economies Act (5191/HR 886), which would boost trade with 
        Cambodia and Laos, and help compensate for lost income in the 
        garment sectors of these countries due to abolition of textile 
        quotas for WTO members.

   Addressing the lingering effects of Agent Orange in Vietnam, 
        which have created an ongoing political problem in the 
        relationship. This could also have a positive effect on 
        military-to-military relations, since many high-level 
        Vietnamese defense officials are war veterans.

   Establishing bi-national public-private educational 
        partnerships for Laos and Cambodia, to provide scholarships for 
        study in the United States.

   Establishing Peace Corps programs in Vietnam and Cambodia 
        and, when appropriate, in Laos. The U.S. has reached agreement 
        in principle to place volunteers in Vietnam and Cambodia, 
        although their precise use is still under discussion. 
        Negotiations for a Peace Corps program in Laos foundered at the 
        eleventh hour in the late 1980's, but the U.S. might explore 
        the possibility of resuming talks, particularly if programs are 
        initiated in Vietnam and Cambodia.

   Supporting the work of field-based American non-governmental 
        organizations in these countries. For example, The Asia 
        Foundation works in Laos with a broad range of institutions, 
        from the National Assembly to women's groups to business 
        councils.

          8. Washington should avoid an over-reliance on ``surrogates'' 
        in Southeast Asia in favor of a more direct and activist policy 
        in the region.

    As the world's only global superpower, Washington's attention is 
often diverted from Southeast Asia to crises in other regions. Some 
policymakers and analysts assume that U.S. interests are protected by 
like-minded Asia-Pacific powers: Japan, Australia and India. Although 
there is commonality with these countries (and partnership in some 
areas with Japan and Australia), there is also competition for markets 
and influence. Moreover, Tokyo, Canberra and New Delhi have their own 
limitations in Southeast Asia that Washington should not borrow. In 
particular, despite the implications of Secretary Rumsfeld's remarks in 
Singapore last week, the U.S. should not assume that India will balance 
China in the region in the foreseeable future.
    Beyond the substance of a more activist approach to Southeast Asia, 
some of which is outlined above, the United States should seek a higher 
profile in the region. The U.S. is unlikely to match the level of 
Chinese attention with Wen Jiabao as the designated point for ASEAN. 
However, President Bush should follow through on plans to attend the 
APEC Summit in Hanoi in 2006, and Secretary Rice should participate in 
annual ASEAN Ministerial Meetings. In addition, Southeast Asian leaders 
have suggested that cabinet-level officials in functional areas--
health, labor, education--visit the region. Lastly, Southeast Asians 
also believe that increasing the number of Congressional delegations to 
the region would strengthen U.S. policy toward Southeast Asia.

    Senator Murkowski.  We will have to make that happen. Thank 
you. I appreciate your comments.
    A great deal of information from all three of you. My 
questions are going to be scattered as I am jumping back and 
forth here. And, Professor, since you just finished up, and it 
is fresh here, I will just start with you.
    You have pointed out the situation with Vietnam, you know, 
a couple of times in your comments, recognizing that China's 
relationship with certain nations in Southeast Asia have not 
always been the most congenial, particularly with Vietnam. They 
have fought numerous wars over the years. And, I guess, as we 
look at the level of influence that China is exerting in the 
region, and, now, the economic ties that some of these 
countries have, particularly I will speak to Vietnam, the 
relationship that they have with China, what role do they look 
to the United States to play as China is emerging and as their 
economic ties are being strengthened? And let us speak 
specifically to Vietnam.
    Professor Dalpino. Okay. Let me make a couple of comments 
about the Chinese/Vietnamese relationship, because it really is 
fairly complicated. They are historic enemies. They are 
historic allies. And there is a fair amount of party-to-party 
contact as Vietnam looks at the way that China is developing as 
a one-party system, but with a market system. And this is 
gradually liberalizing.
    That said, I think there are two things the United States 
can do. One is, the Vietnamese are very much looking to us to 
help them enter the international market. And, of course, WTO 
is a big issue with them. They do still hope to enter by the 
end of this year. A lot of economists think that's unrealistic, 
although yesterday the ranking official in the WTO who has the 
Vietnam portfolio says he thinks it might be possible.
    As you know, Prime Minister Phan Van Khai, is coming at the 
end of this month and will meet with President Bush, and I 
think that is probably at the top of his list, is U.S. approval 
for WTO, and then PNTR, of course, that would have to go along 
with it.
    We do have a nascent security military-to-military 
relationship that has been building primarily through ship 
visits and through exchange of high-level defense ministers. 
That has built-in brakes. But I think that, to the extent that 
it does not raise any red flags with other powers in the 
region, particularly China, Vietnam would probably like to 
proceed at a cautious rate. But there's potential there, too. 
But we are talking about a matter of years, rather than months. 
But, here again, this loops even back to the Agent Orange 
issue, because the community in Vietnam that cares the most 
about that are the veterans who have high-level defense 
positions now.
    Senator Murkowski.  The WTO's next ministerial meeting is 
going to be held in Hong Kong this December. What actions can 
the U.S. take at that conference to demonstrate its goodwill 
toward Southeast Asia? Now, you've mentioned a few particular 
items. You know, you pay attention a little bit more to the 
financial crisis, regional integration. Anything more specific 
that the U.S. might say or do at that time? And what actions, 
then, do you expect to see from China, as the hosts of this 
conference?
    Professor Dalpino. I am really not an economist; and so, I 
am not really up on the December meeting. I would just make a 
couple of comments.
    One, on the currency side, whether or not we support the 
Chang Mai Initiative and a regional currency stabilization fund 
or mechanism, I think, will be very important. As you know, 
China, itself, has flipped on that. When that was first 
proposed, at the beginning of the Asian economic crisis, China 
joined with us in opposing that. They've now gone around to 
that side. And I think we are going to be out-ringed on that in 
many ways.
    Second, I think that, looking to our own enterprise for 
ASEAN initiative, which intends, at some point in the very far 
future, to also be a regional FTA--because all of the 
countries, at some point, would have an FTA--I think that we 
need to look for ways to accelerate that, that are consonant 
with WTO, that do not conflict with it, and that would show a 
little light at the end of the tunnel for some of the countries 
that wouldn't expect to profit from that. We have an FTA with 
Singapore. We are negotiating one with Thailand. Malaysia is 
probably next in the queue, and Malaysia has been surprisingly 
open to this idea. After that, there really is not a very good 
candidate. Indonesia has a lot of problems. And Philippines is 
not open to the idea of an FTA with the United States.
    Another issue is the Millennium Challenge Account. The 
Philippines has been invited to apply, as a threshold country. 
Vietnam shares the same number of--numerically, shares the same 
ability to apply, but does not have the same scores on the 
political side, on the democracy and human right side. But 
seeing more Southeast Asian countries become eligible for that, 
too, I think, would be appropriate, too.
    Senator Murkowski.  Thank you, I appreciate your insight on 
that.
    Let's go back to you, Dr. Pei. It was interesting, in 
reading your testimony and listening to your comments this 
afternoon, as we talk about China's emerging influence we tend 
to think of the actions that are happening outside of China's 
borders. But what is happening inside is certainly equally 
important when it comes to terms of legal and political reform.
    As just a matter of coincidence, we have members of the 
National People's Congress, they are here in Washington this 
week for the annual U.S./China Interparliamentary Group 
meetings. It was interesting to read, and then to hear you 
again repeat, that the legislation that has been enacted into 
law by the NPC were all introduced by the executive branch, 
that that legislation that had been introduced by individual 
members hasn't, or just does not, become law.
    What, if anything, can we, here in Congress, do to help 
those members--you know, our fellow legislators, basically--
gain a reasonable level of influence within their own 
government?
    Dr. Pei. I think this kind of exchange with the Chinese 
National People's Congress is very important and should be 
maintained. But I would urge that, because China is such a huge 
country, and, from my own studies, local legislatures in China 
are actually playing, perhaps, a more important and positive 
role than the National People's Congress. So, I would recommend 
that, in the future, attention--some attention be paid to 
developing programs that would reach out to China's provincial 
legislatures, because these provincial legislatures manage--
have jurisdiction over millions--hundreds of millions of 
people, and if they can play a more positive role, then 
probably can create some differences on the ground.
    Senator Murkowski.  Do you think that this can help in the 
areas--you spoke of the judicial corruption and essentially a 
judiciary system that is rendered meaningless because of the 
corruption, because of just the ineffectiveness of a judiciary. 
Do you think that the local level is where you can begin to 
effect some change within that judicial system?
    Dr. Pei. Oh, yes. Because, according to Chinese law, the 
presidents of local courts have to be approved, have to be 
confirmed. They may be nominated by the local governments, but 
they have to be confirmed by the local legislature. That's a 
very important node--pressure point for local legislature to 
exert their influence.
    In addition, every year local courts have to make--present 
working reports to local legislators, and local legislators can 
refuse to endorse such reports. And while that does not happen 
very often, but, once, it did happen, and when that happened, 
that was national news, because that showed that the people's 
voice can actually be heard on such an important issue.
    Senator Murkowski.  With the failure of a strong judicial 
system, and recognizing the inherent problems and issues of 
corruption within the system, and recognizing the impact that 
that has to those that are looking to invest in China--if I am 
an investor, I want some security that, if I come in and put 
money in--my company in your country, that there's going to be 
some level of recourse--how big of an impediment to investment 
is--are the failures within the judicial system right now?
    Dr. Pei. I think the biggest victims of this ineffective 
judicial system are Chinese entrepreneurs. For political 
reasons--for very understandable political reasons, the Chinese 
Government and the Chinese Communist Party have placed a 
premium on attracting foreign capital. So, foreign investors, 
compared to Chinese private entrepreneurs, are actually much 
better protected under Chinese law. That's because lawsuits 
involving foreign investors are adjudicated at a higher level 
of the judicial system. For example, they are adjudicated in 
intermediate courts, which are less corrupt, than at the basic-
level courts, which are far more corrupt--or far more 
susceptible to corruption and political manipulation.
    Also, within China local governments compete for foreign 
capital. That's why local governments tend to be more friendly 
to foreign capital than to local capital. So, if I were a 
foreign investor, of course, you go into China, and you know it 
is a far more risky place than, say, of developed market, but 
you should also, perhaps, as a level for your own comfort, know 
that your own investment is at least a little bit more 
protected than Chinese domestic capital.
    Senator Murkowski.  Interesting.
    Now, we heard, from both Senator Voinovich and Senator 
Obama, the concern about intellectual property rights. And, 
going back to your comment earlier, that reform is more 
effective, probably, at the local level, what steps are the 
central and the local governments taking to improve protection 
of intellectual property rights?
    Dr. Pei. I think, in this case, the central government 
probably is doing more than local governments. That's because 
Chinese local governments are closely intertwined with local 
economic interests. In many instances, a property--intellectual 
property rights violations, you are likely to find that local 
governments are heavily involved in the operations, or in the 
income streams from those operations. So, I think--and, also, 
we must understand that, given the diversity and size of China, 
the central government is not always effective in enforcing its 
laws. So, you may go to China and get promises from the central 
government, but you also must understand that the central 
government is not always in a position to keep its promises.
    And I was interested to hear Senator Voinovich's story 
about his meeting with Premier Wen Jiabao. He mentioned three 
cases. I can tell you this story about Premier Wen Jiabao, as 
well. There was this peasant lady in China who bought fake 
melon seeds from a local vendor. And, of course, no melon grew, 
as a result. And she pleaded the case to Premier Wen Jiabao, 
and Premier Wen Jiabao gave specific instructions to have her 
case looked into by local authorities on three separate 
occasions. And nothing happened. And that is--so, that is a 
very revealing story about how central authority in China can 
be, often, ineffective at the local level.
    Senator Murkowski.  So, who, in your opinion, or what 
entity, would be in the best situation--or the most effective 
in improving intellectual property rights protection? Is it 
through the WTO? Is it the ASEAN? Is it bilateral 
relationships? How do we work this best?
    Dr. Pei. Ironically, if we know that--who really controls 
the power in China, we will come to this surprising conclusion. 
The Chinese Communist Party is actually the entity, in my 
judgment, that is most capable of dealing with this issue. Of 
course, we have to persuade the Communist Chinese Party that 
protecting intellectual property rights is in the critical 
interests of the party, itself. But, unfortunately for the 
United States, there is no dialogue, in my--according to my 
memory, that exists between the U.S. Government and the Chinese 
Communist Party.
    Senator Murkowski.  How do you get that?
    Dr. Pei. Because the Chinese Communist Party, as an 
organization, is the most effective ruling organization in 
China that can actually enforce its decision, not a particular 
department at a central--in the central government--for 
example, the Commerce Department, which really has very little 
power at the local level.
    Senator Murkowski.  Right. I guess until they decide that 
it is in their best interest, they are not going to follow 
through, to pursue that.
    Dr. Pei. Indeed. The central--the Communist Party, at a 
very high level, has to make a critical political decision that 
this really involves its key interest.
    Senator Murkowski.  Thank you.
    Let's finish up with you, Mr. Herberg. Obviously, coming 
from an energy producing state, energy is always near and dear 
to my heart. And it is--it was interesting to hear you, kind 
of, describe this--just a tangled web of interests as the 
demand in the area grows at what we could--would just consider 
an incredible rate. We can't believe the numbers that we are 
talking about. And yet these are real. And in recognizing the 
pressures that we will see as China seeks to really control the 
aspects of energy--it is not just getting your oil from the 
OPEC nations, it is really looking to--looking for direct 
ownership over oil production, and all aspects of how we get 
there. I do not know whether we can clearly say China is 
unwilling to share their oil. You smile, like maybe, in fact, 
we can make that statement and be conclusive about it. But, you 
know, we talk about bringing China into the IEA for global oil-
sharing programs. This is not something that they have--at 
least from their actions--they indicate a willingness to do 
that. How do you reconcile that?
    Mr. Herberg. Let me just say, I spent 20 years with ARCO, 
and, obviously, we were a major player in Alaska, so I know 
that oil----
    Senator Murkowski.  Did you ever get up north?
    Mr. Herberg. I was in Anchorage, in the North Slope, quite 
regularly, but mostly other places in the world. But I did get 
familiar with Alaska.
    But I think that is the tough issue with China, it views 
energy through this mercantilist-status lens. And the only way 
I can capture it is to say energy--in particular, oil, but 
energy is too important to be left to the markets. And so, the 
leadership focuses on this as a state strategic problem--it is 
high politics of energy security and national security, rather 
than just low politics of energy supplies--so that everything 
they do is through this prism of, How do we, by state effort, 
secure those supplies? Because it is this deep-seated fear that 
energy shortages are going to undermine economic growth, job 
creation, and, ultimately, social instability and the power of 
the party.
    Senator Murkowski.  Well, but, you know, when you think 
about it----
    Mr. Herberg. This is very real.
    Senator Murkowski  (continuing). ----it is very real.
    Mr. Herberg. So, there is a visceral connection between 
energy supply--secure energy supplies, at whatever price, and 
the political power of the leadership and social stability. So, 
that is why this issue is so visceral for them, so important.
    You can hope that, in the future, China goes down the--or 
up the learning curve that they did with the WTO and trade. 
Twenty years ago, trade was entirely state controlled in China. 
It took a 20-year learning curve for them to come around to the 
notion that trade, the WTO, and markets actually can work for 
China. I think, in the long run, China's going to make that 
journey up that learning curve on energy, as well; but, for 
now, they view it in this very zero-sum unilateralist, state-
controlled prism that leads them to sponsor the state 
companies, the state-to-state deals on a whole series of these 
things, to see it in military and maritime terms, in terms of 
controlling sea lanes, to attach it very closely to their 
overall geopolitical architecture, both regionally in Asia, but 
also globally, and attach very much of it to their perception 
of the U.S. control of global energy and oil markets. And so, 
it is a very powerful mindset that is taken--that is there on 
the energy side. It is a very antique, mercantilist viewpoint. 
And until they begin to see that markets can actually work for 
them on the energy side, oil side, I think we are just going to 
see more of this.
    And it is--I think part of the thing that the U.S. 
Government needs to do is engage China at very high levels. You 
know, DOE is working with China bilaterally and in working 
groups and a whole series of things, but I think the--at a 
higher level, we need to begin to talk to them about using 
markets, about regional cooperative mechanisms, joint 
development areas. There is a whole series of things that you 
can do to create confidence. IEA oil sharing, which you 
mentioned. You know, you have this huge imbalance between the 
old IEA system, which was built in the 1970s, based upon the 
oil-demand picture then, and today's oil market, which is 
driven by China, India, Southeast Asia oil demand. But they are 
not in the IEA. They are not in the oil-sharing mechanism. You 
have to find a way to get them into some global oil-sharing 
mechanism.
    Senator Murkowski.  What happens if you do not?
    Mr. Herberg. It will just be more of this zero-sum 
competition for supplies. That is the outlook. Because the 
overall regional mistrust, broader--I mean, Japan/China, China/
India, China/Russia--the overall rivalries, in the broader 
sense there, simply mirror themselves in the lack of trust over 
energy deals.
    And let me give you a perfect example of that. China spent 
three or four years negotiating with Russia for an East 
Siberian oil pipeline to come down to Northeast China. At the 
last minute, Japan jumped in and offered $10-12 billion worth 
of financing field development to build that pipeline, not to 
China, but to the Pacific coast, where it would go into Asia 
and, much of it, to Japan. China viewed that as a strategic 
denial strategy. It was simply a battle over strategic control 
in Northeast Asia. And I have heard that, frankly, from the 
Japanese side, as well.
    And so, you see the same geopolitical triangle problems, 
particularly the Japan/China relationship, mirrored in their 
attempts to solve energy problems, or the way in which they go 
about seeking those energy supplies.
    So, you have to, kind of, attack this thing, I think, at 
both levels, both to try to create mechanisms that de-link 
energy from the broader geopolitical context, so that you can 
talk about cooperative, mutual trust, oil sharing, pipelines, 
regional cooperation, but unless you deal with the broader 
geopolitical rivalries and distrust, as well, which there is no 
system right now in Asia for that--and, frankly, I am not sure 
the U.S. is deeply enough engaged in that--until you begin to 
work on those, as well, you may not make much progress on the 
energy side. But I think, at least in energy, you have to begin 
to try to steer China towards more collaborative, market-
oriented strategies--as well as the others in Asia, because 
this is a--one provokes the other. I think you have to keep in 
mind that the others are doing similar kinds of things, and the 
Chinese are reacting to that, overlaying this deep sense of 
insecurity about their future supplies. And that is a scale 
problem. I mean, just a simple scale problem. Chinese oil 
demand will grow in the next 15 or 20 years by the equivalent 
of Saudi Arabia's total oil production today. China, alone.
    Senator Murkowski.  In how long a time period?
    Mr. Herberg. In the next 20 years. And that is a very short 
period of time in a capital cycle in the oil business, as you 
know. So, it will grow by the equivalent of a Saudi Arabia, 
from, say, 2002 to 2025. These are big numbers, and it really 
focuses the mind of the leadership. Where is this oil going to 
come from? Where is the natural gas going to come from? Which--
how much of it will be imported from----
    Senator Murkowski.  Do you see the same picture, then, with 
natural gas as you do with oil, in terms of how China is 
viewing the need for the resource?
    Mr. Herberg. Natural gas is not as acute a problem, because 
they are not--right now, they do not import natural gas at all, 
and that is probably because they use so very little, 3 percent 
of their mix. They will be importing, over time, really--
really, after 2010, imports will accelerate. But, even 20 years 
out, it would be unlikely that they would be importing more 
than 30 or 40 percent of their gas. But that is still a 
significant number. And so, at some level, in the long run, 
that also feeds this sense of, ``Where are we going to get 
these supplies?'' And it is not a coincidence that virtually 
all that imported gas will come from many of the same places--
the Persian Gulf, Russia. Fortunately, a lot of that from 
Southeast Asia, which has much better gas, LNG, capabilities--
Australia, Indonesia, and Malaysia, for example. So, gas 
reinforces some of the same problems, but it is not nearly as 
acute a problem for China.
    Senator Murkowski.  Well, recognizing that they will be 
looking to the Middle East for so much of their imported oil, 
with just ever-growing dependence on OPEC nations for their 
energy needs, how does this impact our--well, I guess, their 
foreign policy and the policy challenges that we face as a 
nation in meeting our energy needs, as it relates to oil?
    Mr. Herberg. I think it is--the Persian Gulf is where this 
is really going to be an important issue. China will become a 
major player in the Persian Gulf, politically, geopolitically. 
That is inevitable.
    Senator Murkowski.  How much did they get--how much are 
they relying on Middle Eastern oil right now?
    Mr. Herberg. They import three-plus-million barrels a day. 
About half of that comes from the Persian Gulf.
    Senator Murkowski.  About half.
    Mr. Herberg. A little over half. So, that is, you know, one 
and a half out of a total consumption of about six and a half. 
So, it is significant now. The long-term issue is that the bulk 
of reserves are in the Persian Gulf. Incremental supplies, 
globally, if you take world demand from 80 to 120, which is an 
IEA or a DOE forecast, probably half to two-thirds of that is 
going to have to come from the Persian Gulf. So, just by the 
scale of the resources, an estimate would be, for China, 20 
years from now, it would be importing 75 percent of its oil, of 
which two-thirds would be from the Persian Gulf. So, it will 
importing oil on the scale of five- or six-million barrels a 
day from the Persian Gulf 20 years from now. And you can 
already begin to see China beginning to focus its diplomacy on 
the Gulf, both in Saudi Arabia--on both sides of the Gulf and 
throughout the region. But it will become a major player in the 
region. I think, for the U.S., we need to begin to think 
about--we are used to being the dominant player in the Persian 
Gulf. How do we accommodate China's growing influence?
    Another piece of this, not to give you too many numbers, 
but roughly two-thirds of Persian Gulf oil exports now go to 
Asia. They do not go to Europe or the U.S., really, and--
relatively small. Most of the Persian Gulf oil exports go to 
Asia, and a bigger and bigger share of that will be China in 
the future. That is not lost on the Persian Gulf producers. 
They are turning East, diplomatically, as well. So, you see a 
very real, kind of, nexus of interests there between the Gulf 
and Asia, and particularly China, because it is going to be 
such a big piece of this, and also as a geopolitical player, 
unlike much of the rest of Asia. We will have a competitor for 
influence in the Gulf. I do not know whether that is good or 
bad, because our interests converge in the stability of the 
Gulf, because we both will depend on flows being stable, oil 
flows from the Gulf. But we also view Middle East and Persian 
Gulf politics in a very different way. So, I would think it is 
going to get a little stickier.
    Senator Murkowski.  That is one way to put it.
    I appreciate the time that you all have given to us this 
afternoon, and I greatly appreciate your comments. Thank you.
    And, with that, we will stand adjourned.

    [Whereupon, at 4:40 p.m., the hearing was adjourned.]

                                    

```