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[Senate Hearing 108-58]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 108-58

       EXAMINING THE EFFECTS AND CONSEQUENCES OF AN EMERGING CHINA

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

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON EAST ASIAN
                          AND PACIFIC AFFAIRS

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 19, 2003

                               __________

       Printed for the use of the Committee on Foreign Relations

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

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                            WASHINGTON : 2003
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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming             RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio            BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee           BILL NELSON, Florida
NORM COLEMAN, Minnesota              JOHN D. ROCKEFELLER IV, West 
JOHN E. SUNUNU, New Hampshire            Virginia
                                     JON S. CORZINE, New Jersey

                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                 ------                                

                       SUBCOMMITTEE ON EAST ASIAN
                          AND PACIFIC AFFAIRS

                    SAM BROWNBACK, Kansas, Chairman

LAMAR ALEXANDER, Tennessee           JOHN F. KERRY, Massachusetts
CHUCK HAGEL, Nebraska                JOHN D. ROCKEFELLER IV, West 
GEORGE ALLEN, Virginia                   Virginia
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
                                     JON S. CORZINE, New Jersey

                                  (ii)

                            C O N T E N T S

                              ----------                              
                                                                   Page

Brownback, Hon. Sam, U.S. Senator from Kansas, opening statement.     2
Freeman, Mr. Charles, Deputy Assistant U.S. Trade Representative, 
  Office of the U.S. Trade Representative, Washington, DC........    10
    Prepared statement...........................................    13
    Responses to additional questions for the record from Senator 
      Allen......................................................    66
Kapp, Dr. Robert A., president, US-China Business Council, 
  Washington, DC.................................................    24
    Prepared statement and attachments...........................    28
Lampton, Dr. David M., George and Sadie Hyman Professor of China 
  Studies, Johns Hopkins School of Advanced International Studies 
  and director of Chinese Studies, The Nixon Center, Washington, 
  DC.............................................................    56
    Prepared statement...........................................    59
Lugar, Hon. Richard G., U.S. Senator from Indiana, prepared 
  statement......................................................     3
Rosen, Ms. Hilary B., chairman and chief executive officer, 
  Recording Industry Association of America, Washington, DC......    41
    Prepared statement...........................................    43
Schriver, Mr. Randall G., Deputy Assistant Secretary of State for 
  East Asian and Pacific Affairs, Department of State, 
  Washington, DC.................................................     4
    Prepared statement...........................................     7
    Responses to additional questions for the record from Senator 
      Biden......................................................    67
    Responses to additional questions for the record from Senator 
      Feingold...................................................    68
Wortzel, Dr. Larry M., vice president and director, the Kathryn 
  and Shelby Cullom Davis Institute for International Studies, 
  The Heritage Foundation, Washington, DC........................    49
    Prepared statement...........................................    52

                                 (iii)

  

 
      EXAMINING THE EFFECTS AND CONSEQUENCES OF AN EMERGING CHINA

                              ----------                              

                       WEDNESDAY, MARCH 19, 2003

                           U.S. Senate,    
                 Subcommittee on East Asian
                               and Pacific Affairs,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m. in 
room SD-419, Dirksen Senate Office Building, Hon. Sam Brownback 
(chairman of the subcommittee), presiding.
    Present: Senators Brownback, Alexander, Hagel, Allen, 
Voinovich, Kerry, Rockefeller, Feingold, and Corzine.
    Senator Brownback. Thank you all for joining us today. I 
want to thank everybody for participation in exploring an 
important set of topics regarding China, economic emergence in 
Asia, and the possible consequences this could have for the 
region and for U.S. policy.
    At the outset, I want to say that this is really just an 
overview of an immense topic, one I feel it is important for us 
to explore. I come from a heavily agricultural state. I know 
how important trade is to our economy. And trade with China is 
an increasingly important part of the overall economy for the 
United States. Total trade between the United States and China 
reached $147 billion a year in 2002 making China the fourth-
largest trading partner with the United States. I would note I 
met recently with an international buyer for Wal-Mart, and they 
buy so many products out of China that Wal-Mart itself is the 
tenth-largest trading partner with China.
    As with any important trade relationship, it is important 
for American policymakers to ensure that U.S. interest is being 
served. In the case of China, we are only starting out in the 
process of WTO implementation. After 1 year, we are already 
encountering some difficulties. China is in violation of its 
WTO commitments regarding tariff-rate quotas, export subsidies, 
and regulations on genetically modified organisms, which 
negatively affect agricultural producers in my state and across 
the country, especially considering that China is the fastest-
growing export destination for goods from Kansas. USTR must be 
vigilant in its efforts to ensure China complies with its WTO 
commitments in these areas and in general.
    China is also infamous for its failure to adequately 
protect intellectual property rights. While we have seen 
improvement, more clearly needs to be done. IP piracy losses in 
China amount to $1.85 billion in 2002, and piracy rates 
continue at over 90 percent across all copyright industries.
    When I was last in China in December, just outside of our 
hotel they were selling the new James Bond movie on the street 
corners. I had not yet seen it in theaters, and I do not know 
if it just comes late to our state or it gets early to China 
and the vendors, but they were selling some pretty good-looking 
cover copies of the new James Bond movie at that time.
    Trade is only part of the issue we will be exploring today. 
Another key concept to examine is the rapid rate of foreign 
investment, which China has steadily drawn in the past few 
years. There has been a strong focus on investment reforms and 
incentives over the past 10 years, which has led to a steady 
flow of foreign capital into the country. We can see the impact 
of this growth by looking at the levels of foreign direct 
investment [FDI]. In 1983, China's FDI was $636 million, about 
two-thirds of a billion dollars. In 2002, China's FDI was 
approximately $53 billion. In terms of percentages, the U.N. 
reports that FDI into China grew by nearly 13 percent in 2002, 
even while it fell by 27 percent in all countries for the same 
time period.
    While all this growth is encouraging for China, it does 
raise some possible questions about China's role in the region 
if it continues on this path of growth, to the exclusion of 
other countries in the region. Of particular concern for me is 
India, a country of nearly the same size and population as 
China, but whose economic reforms have not moved forward nearly 
as swiftly despite attempts at market reform for the past 10 
years.
    We should explore the potential consequences that could 
come from China being an economic powerhouse, as it is and as 
it continues to grow. Would the profit be used to remake the 
Chinese military? Would this economic growth lead to more or 
less aggressive behavior toward Taiwan? Will the political 
leadership in China use the profit from their country's growth 
in ways that may be damaging for long-term U.S. security 
interests?
    By no means am I suggesting that we should vary from our 
position supporting free trade with China. I voted for PNTR and 
remain a supporter. But it is important for us to examine some 
of the long-term consequences of the economic growth going on 
in China so that we and our friends in the region can approach 
the future from a more informed perspective.
    That is the intent of this hearing. We will hear from a 
number of expert witnesses. Our first panel, from the 
administration, I am delighted to have present Mr. Randall 
Schriver. He is Deputy Assistant Secretary of State for East 
Asian and Pacific Affairs. And then Mr. Charles Freeman, Deputy 
Assistant U.S. Trade Representative--one of my alma mater 
institutions; I was there in 1990-91--he is with the Office of 
U.S. Trade Representative, and works on issues regarding China.
    [The opening statement of Senator Brownback follows:]

               Opening Statement of Senator Sam Brownback

    Coming from a heavily agricultural state like Kansas, I know how 
important trade is to our economy. And trade with China is an 
increasingly important part of our economy. Total trade between the 
U.S. and China reached $147 billion in 2002--making China our 4th 
largest trading partner.
    As with any important trade relationship, it is important for 
American policymakers to ensure that U.S. interest is being served. In 
the case of China we are only starting out on the process of WTO 
implementation. After one year we are already encountering 
difficulties. China is in violation of its WTO commitments regarding 
Tariff Rate Quotas, export subsidies, and regulations on genetically 
modified organisms, which negatively affect agricultural producers in 
my state, especially considering that China is the fastest growing 
export destination for Kansas goods. USTR must be vigilant in its 
efforts to ensure China complies with its WTO commitments in these 
areas, and in general.
    China is also infamous for its failure to adequately protect 
intellectual property rights. While we have seen some improvement, more 
needs to be done. IP piracy losses in China amounted to $1.85 billion 
in 2002, and piracy rates continue at over 90 percent across all 
copyright industries.
    Another key concept to examine is the rapid rate of foreign 
investment which China has steadily drawn in the past few years. There 
has been a strong focus on investment reforms and incentives over the 
past ten years--which has led to a steady flow of foreign capital into 
the country. We can see the impact of this growth by looking at the 
levels of foreign direct investment, or FDI. In 1983, China's FDI was 
$636 million. In 2002, China's FDI was at approximately $53 billion. In 
terms of percentages, the U.N. reports that FDI into China grew by 
nearly 13 percent in 2002 even while it fell by 27 percent in all 
countries for the same time period.
    We should explore the potential consequences that could come from 
an unchecked economic powerhouse in China. Would the profit be used to 
remake the Chinese military? Would this economic growth lead to more or 
less aggressive behavior toward Taiwan? Will the political leadership 
in China use the profit from their country's growth in ways that may be 
damaging for long-term U.S. security interests?
    By no means am I suggesting that we should vary from our position 
supporting free trade with China. I voted for PNTR and remain a 
supporter. But it is important for us to examine some of the long term 
consequences of the economic growth going on in China, so that we, and 
our friends in the region, can approach the future from an informed 
perspective.

    [A statement submitted by Senator Lugar follows:]

             Prepared Statement of Senator Richard G. Lugar

    I would like to thank Senator Brownback for chairing this important 
hearing. Those of us who have watched China's remarkable growth during 
the past two decades can only marvel over how much has changed since 
the dark days of the Cultural Revolution. Economists now tell us that 
at current growth rates, the size of China's economy will double every 
10 years.
    China's economic growth has meant rising standards of living for 
millions of its people, who can now buy apartments and own cars and 
other goods unimaginable just a decade ago. Along with that has come an 
increase in personal freedom. Average Chinese citizens can travel, 
start businesses, file suits in court and surf parts of the Internet. 
China is now the world's second-largest market for personal computers.
    This increasing wealth and China's recent membership in the World 
Trade Organization have created many opportunities for the sale of 
American-produced goods, agricultural products and services. China is 
the largest foreign buyer of U.S. soybeans, and overall the seventh 
biggest market for American exports.
    We in the United States have encouraged China to spread the 
benefits of growth more widely throughout the country and to crack down 
on corruption. We also have pushed China to embrace democracy, 
political freedom, and respect for human rights.
    Clearly the emergence of a more prosperous and self-assured China 
is a positive development for East Asia and the world. No one has 
benefited more from this progress than China itself. But with those 
benefits come responsibilities, and as China becomes a more significant 
player on the global stage, it must take on more of the duties of 
global citizenship.
    In the area of trade, in particular, China must follow through with 
the commitments it has made in the WTO by enforcing its laws against 
counterfeiting and piracy of intellectual property. The illegal copying 
of software, music, movies and other copyrighted material in China cost 
American firms and individuals an estimated $1.85 billion in lost sales 
last year alone.
    Likewise in agricultural trade, the United States Trade 
Representative late last year raised serious concerns about China's 
willingness to fully implement its WTO obligations. In January the Bush 
administration protested China's moves to delay approval of certain 
bio-engineered crops for import. Industries in the service sector and 
elsewhere have complained that China has either not passed regulations 
required by the WTO or is not implementing them fairly. Beijing must 
live up to the promises it has made in the international trade arena.
    China must also acknowledge the responsibilities that go with its 
status as an economic force within the Asia-Pacific region. Other 
countries also need the foreign investment that is flowing into China, 
and many of China's exports compete in world markets against the 
exports of its neighbors. China must engage its neighbors so that its 
success benefits other developing countries in the region.
    I thank today's witnesses for agreeing to appear before us, and I 
look forward to their testimony.

    Senator Brownback. Gentlemen, welcome. I am delighted to 
have you here. And we will open the floor up. We will take your 
full written statements into the record. If you want to give 
those, you can. If you would like to summarize and make your 
key points, that is up to you, as well. We are delighted to 
have you here.
    Mr. Schriver.

  STATEMENT OF RANDALL G. SCHRIVER, DEPUTY ASSISTANT SECRETARY 
  OF STATE FOR EAST ASIAN AND PACIFIC AFFAIRS, DEPARTMENT OF 
                     STATE, WASHINGTON, DC

    Mr. Schriver. Thank you, Mr. Chairman. And I appreciate the 
opportunity to participate in this hearing today, particularly 
since there are other international issues that are rightfully 
occupying the headlines and occupying everyone's attention. It 
is important not to lose sight of longer-term and, I would 
argue, strategic challenges that we are facing. And I cannot 
think of any challenge more important than how to deal with the 
long-term consequences of China's emergence.
    I would like to submit my full statement to the record and 
give a brief summary now.
    The administration has worked very hard over the last 2 
years to improve our relationship with China, and I think the 
progress has been quite remarkable given that the EP-3 incident 
was a mere 2 years ago, even less than that. We have tried to 
achieve a point where we can have a more constructive and 
cooperative relationship with China, and I would in no way 
minimize the important differences that we have, issues such as 
Taiwan, human rights, and religious freedoms, and 
nonproliferation, but I think we have achieved a state now 
where the U.S./China bilateral relationship is one that carries 
great potential to be a more constructive and cooperative 
relationship, certainly much more so than in the past.
    And if I could just briefly cite a few areas, China has 
been a partner in the war on terrorism. China voted in favor of 
U.N. Security Council Resolution 1373, they publicly supported 
our campaign in Afghanistan, and they contributed to 
reconstruction efforts in Afghanistan to the tune of about 150 
million U.S. dollars. Quite significant. They have engaged in 
bilateral discussions with us on counter-terrorism, and we are 
developing, I think, a very positive agenda. At the same time, 
we know that there are those in China who are interested in 
using the issue of terrorism to crack down on some who are 
merely expressing their views and their opposition to the 
government, and part of our dialog is, of course, to not 
support those efforts in any way and, in fact, to make sure 
that China's counter-terrorism efforts are consistent with our 
own.
    On Iraq and North Korea, it is known that China voted in 
favor of U.N. Security Council Resolution 1441, and they have 
criticized Iraq for its failure to disarm and to comply with 
U.N. Security Council resolutions.
    With respect to North Korea, China has condemned North 
Korea's decision to withdraw from the NPT. They have voiced 
their opposition to nuclear weapons being introduced on the 
Korean Peninsula, and they voted in favor of referring the 
issue of DPRK's noncompliance in the IAEA Board of Governors to 
the U.N. Security Council.
    So although on these three issues I mentioned, we are not 
in complete agreement with China, these are the major issues of 
the day, and I think it is fair to say that our cooperation 
with China has been more productive and constructive than in 
the past. Again, were not in complete agreement, but there is a 
dialog and there is some constructive cooperation.
    Surely, this is not destined to be a static relationship, 
though. China is growing and evolving. And as the topic of this 
hearing suggests, we need to understand and account for the 
consequences of China's emergence.
    Primarily, when we talk about China's emergence, we are 
speaking, as you suggested, Mr. Chairman, of China's economic 
growth and economic emergence and how that translates into 
comprehensive national power. So I would like to briefly 
discuss China's economic growth and its modernization efforts.
    I think it is inevitable that China is going to modernize 
and grow, so it is incumbent upon us to have the kind of 
relationship where we can channel that in productive ways. It 
is in our interest to promote China's economic reform as it 
modernizes. We want China to be a responsible member of the 
world community living by global trade and financial rules.
    They are in the midst of an economic transformation. It 
gives us an opportunity not only to promote ties, economic and 
commercial ties, between our two countries, but, through that, 
to contribute to China's political evolution and to a more 
liberal society, albeit subtly and albeit it with limited 
influence to do that from the outside, but I think it is an 
important element of the commercial relationship.
    You mentioned foreign direct investment has contributed 
greatly to China's economic growth. We see this as also 
exposing China to modern business and labor practices, another, 
I would argue, subtle benefit to these kinds of relationships 
that we are developing.
    Mr. Chairman, you mentioned that China is our fourth-
largest trading partner, it's our seventh-largest export 
market, and our fourth-largest source of imports. The total 
two-way trade between the two countries has expanded greatly 
from about $33 billion in 1992 to almost $150 billion in 2002.
    China's entry into WTO, I think, is the greatest signal 
that it is committed to further opening and reforming its 
economy. Monitoring and enforcing China's implementation of WTO 
commitments is, of course, the centerpiece of our economic 
relationship and, in fact, our overall bilateral relationship. 
And I know Mr. Freeman will discuss that in greater detail. But 
we do have serious concerns about WTO compliance, especially in 
the areas of agriculture, services, and intellectual property.
    Largely, we view China's integration into regional and 
global organizations as a largely positive development. Not 
only does China commit itself, by joining these organizations, 
to play by the rules in a different fora, but it has an 
increasing stake in seeing that others play by the rules. But 
we do need to be vigilant with respect to second- and third-
order effects related to this economic growth. And Mr. 
Chairman, you mentioned one. As China grows economically, 
certainly the military will be a potential beneficiary of that 
economic growth. That is why we feel it is important to sustain 
a modest military-to-military relationship with the People's 
Liberation Army consistent with the guidelines that Congress 
has given. We think it is important that as the People's 
Liberation Army modernizes, that we have windows on that 
modernization effort, we have some transparency, so we can 
better understand it as it evolves. Also, through a 
relationship with the PLA we have the opportunity to avoid 
miscalculations and misjudgments. This can actually contribute 
to a deterrent effect so that they understand our very 
important interests and what we are prepared to do to protect 
those interests.
    I think it is also important to understand that China's 
economic growth and modernization does not translate directly, 
necessarily, into an upward trajectory of increased 
comprehensive national power. It is more complicated than that. 
As China is integrated into the global economy, several 
challenges are, in fact, heightened that China is dealing with. 
Stripping themselves of their bloated state-owned enterprises, 
which are a drag on the economy, carries the potential for 
great social unrest, which China is dealing with. Corruption 
remains a serious problem. Chinese have tremendous issues 
related to urban unemployment. There is a great disparity, of 
course, between what can be earned in rural China versus urban 
China. This has led to a floating population of either 
underemployed or unemployed Chinese internal migrants. China is 
a net energy importer, and its dependency on foreign oil is 
increasing significantly year by year.
    These challenges are coupled with other significant 
challenges--for instance, dealing with HIV/AIDS in China, which 
is a serious, serious problem--as well as the rapid 
industrialization they are undergoing and the effects that that 
is having on the environment. This, if not dealt with by the 
Chinese, will have serious repercussions for their interest in 
sustaining economic growth.
    Responsibility for these challenges will rest largely with 
China's fourth generation of leaders. I think conventional 
wisdom is that these leaders are younger, more technocratic, 
and seemingly open to confronting these vast economic 
challenges. I think the reality is they remain largely an 
unknown quantity. In the Chinese system, you make your way to 
the top by not deviating from the script and reading your 
talking points for 12 years. So now that they have assumed the 
mantle of power, we will see actually what their governance 
will look like.
    I want to briefly also mention three important issues we 
have with China. First, human rights and religious freedom, and 
I know this is an issue very dear to you, Senator, as I know 
you addressed the Commission on International Religious Freedom 
just last week and made some remarks. We had some positive 
momentum last year in the area of human rights, and we began a 
dialog with the Chinese headed by our Assistant Secretary, 
Lorne Craner. I think there were some positive feelings that 
came out of that initial effort. Unfortunately, the last 3 
months there has been a series of setbacks and some very 
negative experiences. Secretary Powell, when he was in Beijing 
last month, mentioned this publicly as part of his press 
conference, that we were greatly disappointed in these 
setbacks.
    The Chinese have also taken some positive steps in the area 
of nonproliferation. They have promulgated some export control 
laws, which, if implemented, carry the potential to vastly 
improve their system. But implementation is certainly the key. 
We are aware that there is only a small number of people, a 
handful of people, at MOFTEC who work on export controls. They 
need to vastly increase their resources and increase their 
attention to training and understanding how you implement an 
effective export-control system, and we are willing to work 
with them on that.
    And finally, Taiwan, which, from the PRC perspective is 
always the most sensitive issue in our relationship. We regard 
Taiwan as a great success story in the United States. Taiwan 
has made tremendous progress with respect to democratization 
and economic modernization. Through our unofficial relationship 
with Taiwan, the United States will continue to promote 
Taiwan's story as a success and as a model for others. 
President Bush has emphasized to China that our policy is 
consistent. We do have our one-China policy, which is defined 
not only by the three communiques, but also by the Taiwan 
Relations Act. We have abiding interest, above all else, in a 
peaceful resolution of cross-trade differences, and we've urged 
China to renounce the use of force and open a dialog with 
Taiwan.
    To conclude, the U.S./China relationship remains a work in 
progress. Despite difficulties, we have reached a point where 
we are today where we have a great deal of high-level 
interaction--three Presidential visits in a little over a 
year--and a recognition that China and the United States do 
share some common interests on some of the most pressing 
matters of the day. We know that a China that contributes to 
the common solution of global problems, that increasingly 
shares our commitment to world peace and stability, open 
markets, and cooperation, as well as individual freedom, is 
clearly in our interest. Of course, the great trick is how we 
get there, and that is what we are working on, and we will 
remain vigilant in that effort.
    Thank you, Mr. Chairman, and I look forward to your 
questions.
    [The prepared statement of Mr. Schriver follows:]

 Prepared Statement of Randall G. Schriver, Deputy Assistant Secretary 
    of State for East Asian and Pacific Affairs, Department of State

    Mr. Chairman, thank you. I appreciate the opportunity to testify 
before this subcommittee today.
    President Bush, Secretary Powell and all of us in the 
Administration have worked over the last two years to forge a candid, 
constructive, and cooperative relationship with China. As China 
modernizes and grows, it is in our interest to promote China's 
continued economic reform. We want China to be a responsible member of 
the world community, living by global trade and financial rules. 
China's ongoing focus on market-oriented economic development holds 
promise that it will increasingly contribute positively to economic 
growth in the region.
    While not minimizing the significant differences that remain 
between us in important areas like human rights, nonproliferation and 
Taiwan, I can report to you that the Administration's approach to China 
has resulted in a U.S.-China relationship that carries great potential 
to be more cooperative and productive than in the past.
    Let me cite some examples where the United States and China are 
working closely. China has been a strong partner in the war on 
terrorism. China voted in favor of UNSCR 1373, a rare vote under 
Chapter VII of the UN Charter which potentially authorizes the use of 
force, publicly supported the coalition campaign in Afghanistan, and 
contributed $150 million of bilateral assistance to Afghan 
reconstruction following defeat of the Taliban. Shortly after 9-11, the 
U.S. and China commenced a counter-terrorism dialogue. The third round 
of that dialogue was held in Beijing in February. While we recognize 
that China faces its own terrorist problems, we have been steadfast and 
clear that China must not use the war on terror to justify any 
crackdown on those who call peacefully for greater autonomy, religious 
freedom, and political rights.
    China voted in favor of UNSCR 1441 and has criticized Iraq's 
failure to destroy its weapons of mass destruction. China has stressed 
its opposition to the DPRK's decision to withdraw from the Nuclear Non-
Proliferation Treaty, its concerns over North Korea's nuclear 
capabilities and its desire for a non-nuclear Korean peninsula. It 
voted to refer the DPRK's noncompliance with its IAEA obligations to 
the UN Security Council in New York.
    Turning to economics, I want to highlight the importance to the 
United States of China's ongoing economic transformation. Not only has 
this transformation resulted in economic growth and expanded commercial 
ties between our countries, but it also has contributed to China's 
political evolution to a more liberal society. Market reforms and 
economic engagement have unleashed individual initiative and 
entrepreneurship. Foreign direct investment has both contributed to 
economic growth and exposed China to modern business and labor 
practices. China's economic growth is a bright spot in the global 
economy and today China accounts for about four percent of the world 
economy. Per capita income has increased at an annual average rate of 
almost nine percent since 1980. China attracted $52.7 billion worth of 
foreign direct investment, in 2002 becoming the world's top destination 
for foreign direct investment.
    China today ranks among the world's half-dozen largest trading 
nations. It is now our fourth-largest trading partner, seventh-largest 
export market and fourth-largest source of imports. Total two-way trade 
between the U.S. and China has grown from $33 billion in 1992 to almost 
$150 billion in 2002. With growing imports, particularly from Southeast 
Asian nations, China has become one of the most important engines of 
growth for both the region and the world.
    China's entry into the WTO signaled its commitment to further open 
and reform its economy. WTO membership will accelerate China's economic 
reforms and provide more export and investment opportunities for U.S. 
companies. This will translate into more jobs for Americans. Monitoring 
and enforcing China's implementation of its WTO commitments is a 
centerpiece of our efforts. For the most part, we credit China for 
making significant progress in implementing its WTO commitments during 
its first year as a WTO member.
    We do have some serious concerns with China's WTO compliance, 
especially in the areas of agriculture, services, intellectual property 
rights enforcement as well as the cross-cutting issue of transparency. 
We are working closely with USTR, the Commerce and Agricultural 
Departments and through our Embassy with the Chinese government, to 
address these concerns. Although progress is not easy, we remain 
encouraged that China's leaders have repeatedly confirmed their 
intentions to implement China's market access commitments. At the same 
time, when these intentions do not translate into positive results, we 
also stand ready to use multilateral means, including WTO dispute 
settlement, to enforce those commitments.
    China's economic growth has made it an increasingly important 
regional and global player. The PRC is pursuing a Free Trade Agreement 
(FTA) with ASEAN. It is pursuing the Closer Economic Partnership 
Agreement with Hong Kong and has explored FTAs with Korea and Japan. 
China has been an active participant in APEC for years and served as a 
host in 2001. Having acceded to the WTO in December 2001, it is now 
playing an increasingly visible role in that organization. In our 
efforts to successfully conclude the WTO Doha Development Agenda, the 
United States has already begun consulting with China on areas of 
mutual interest--such as reducing barriers to agricultural trade.
    We view China's integration into regional and global organizations 
and arrangements as a positive development. Not only is China 
committing itself to play by the rules of a different fora, but it has 
an increasing stake in seeing that others do the same. And as its 
economy and prosperity become linked more closely to relationships with 
trading partners, it has a greater stake in peace and stability in the 
Asia-Pacific region and the world.
    We also need to be aware that the Chinese military is a beneficiary 
of China's economic growth. Thus, as we proceed in our overall 
bilateral relationship, it will remain important that we sustain a 
modest military-to-military relationship with the People's Liberation 
Army within the guidelines established by Congress. This will allow for 
better understanding of the PLA as it modernizes, and will give us 
lines of communication to PLA leaders so as to reduce to possibility of 
miscalculation.
    Of course, integration into the global economy and its institutions 
also highlights challenges for the Chinese government. A high level of 
nonperforming loans weighs down its state-run banking system. Capital 
markets are immature. Bloated state-owned enterprises are a drag on 
growth. Corruption remains a serious problem. Income disparities 
between coastal urban and inland rural areas are rapidly growing and 
Chinese concerns about urban unemployment and surplus rural labor 
hinder the pace of economic reform. China is a net energy importer and 
increasingly dependent on foreign oil. These economic challenges are 
coupled with other threats. China is already experiencing a rapidly 
growing HIV/AIDS epidemic. It faces large-scale desertification and 
water shortages, while rapid industrialization has damaged the 
environment. Successfully dealing with all of these problems will not 
be easy.
    Responsibility for these challenges will rest largely with China's 
``fourth generation'' leadership. Over the past six months Beijing has 
begun setting this new leadership in place, through a partial transfer 
of power. These leaders are younger, more technocratic and are 
seemingly open to confronting vast economic and political challenges. 
We look forward to working with China's new leadership to promote 
better economic governance and encourage political reform in China.
    Let me briefly comment on three other important issues we have with 
China. Human rights and religious freedom remain serious issues of 
concern. Despite some positive momentum last year and greater signs 
that China was willing to engage with the U.S. and others on this 
topic, there has been some serious backsliding in recent months. We 
were encouraged in 2002 by the release of a significant number of 
political and religious prisoners, and by China's agreement to interact 
with UN experts on torture, arbitrary detention and religion. However, 
we have seen virtually no movement on these promises. We recognize that 
China still has a long way to go in instituting the kind of fundamental 
systemic change that will protect the rights and liberties of all its 
citizens. Congressional support for our democracy, human rights and 
rule of law programs is helping to promote just this kind of change. We 
have not relaxed our efforts to promote respect for human rights and 
religious freedom in China.
    The Chinese also have taken some steps to curb the proliferation of 
missiles and WMD. In August 2002, China promulgated missile-related 
export controls and in October 2002 issued updated regulations on the 
export of dual-use chemical and biological agents, in addition to its 
1997 nuclear export controls. Getting these commitments is important, 
but the challenge is full implementation and effective enforcement. We 
look forward to working with China to that end.
    Taiwan remains one of the most sensitive issues in U.S.-China 
relations. Over the last two decades, Taiwan has made tremendous 
progress with respect to democratization and economic modernization. 
Through our unofficial relationship with Taiwan, the United States will 
continue to promote Taiwan's story as a success and as a potential 
model for others. President Bush and others have emphasized to China 
that our policy is consistent and unchanged. We are committed to our 
``one China'' policy and the three communiques, as well as to our 
obligations under the Taiwan Relations Act to ensure Taiwan has an 
adequate self-defense capability. We do not support Taiwan 
independence. We have an abiding interest, above all else, in the 
peaceful resolution of cross-Strait differences. We have urged China to 
renounce the use of force and open a dialogue with Taiwan.
    To conclude, the U.S.-China relationship remains a work in 
progress. Despite difficulties, we have reached the point where we are 
today--an unprecedented three presidential visits in a little over a 
year, a recognition that China and the United States have common 
interests on some of the most pressing matters of the day, and a 
strong, growing economic relationship clearly in the interest of both 
nations and the global economy. A China that contributes to the common 
solution of global problems, that increasingly shares our commitment to 
world peace, stability, open markets, cooperation, and individual 
freedom is clearly in our interest.

    Senator Brownback. Thank you, Mr. Schriver.
    Mr. Freeman.

   STATEMENT OF CHARLES FREEMAN, DEPUTY ASSISTANT U.S. TRADE 
   REPRESENTATIVE, OFFICE OF THE U.S. TRADE REPRESENTATIVE, 
                         WASHINGTON, DC

    Mr. Freeman. Thank you very much, Mr. Chairman. It is an 
honor for us to have the opportunity to appear here today and 
to testify. At USTR, we tend to be somewhat obsessive in our 
focus on economic relations, but we are aware of what is going 
on in the greater world around us, so it is doubly important 
for us that we are here today carrying on with our work, and so 
we appreciate the opportunity.
    I am going to speak almost exclusively on WTO 
implementation issues with respect to China and leave the more 
weighty matters to Mr. Schriver in his questions.
    But just, as you are aware, Mr. Chairman, the USTR 
publishes every year a report to Congress at the one-year 
anniversary of China's accession to the WTO, which is December 
11, a report on China's implementation progress to date. We had 
our first report in December of last year, and many of my 
remarks today derive from that report, so I commend that to the 
Chair and to the members and to the general public for a 
broader assessment of China's implementation record to date.
    But I will say, without giving a thumbs up or a thumbs down 
on China's implementation progress, China certainly has made 
significant progress in implementing its agreement, although, 
as Mr. Schriver says, implementation is a work in progress 
similar to the relationship with the United States. Progress 
was made on may of the systemic changes that were required 
under the accession protocol, particularly in terms of 
implementing the framework of laws and regulations required by 
the protocol. I think China, by mid-2002, had changed or 
repealed some 2,500 trade-related laws and regulations. And 
there are similar reviews that are ongoing with respect to 
other laws and regulations throughout not only the central, but 
the local governments.
    China also had devoted a great deal of attention to 
restructuring its government to meet the challenges of WTO. 
There are a variety of ministries and agencies in China that 
have a role in overseeing implementation and overseeing trade 
in goods and services, and there were a variety of things that 
China did to react to the demands of WTO.
    Another major effort that China made over the first year 
after accession was an effort to train and educate broadly 
throughout China. It is not only the different agencies and the 
officials within China, but also the general public, about what 
it means to be WTO consistent. And those efforts have, without 
doubt, proved very beneficial.
    That said, you know, China did undertake to make tariff 
reductions; for the most part, they came on time. I think, 
without question, the tariff climate for U.S. businesses 
attempting to gain market access to China has improved 
significantly since accession. So, for the most part, a lot of 
the mechanical steps on accession were handled without 
incident. And so although those are not without problems, that 
is something we can take some comfort in.
    That said, there are a number of serious problems that you, 
Mr. Chairman, mentioned, and I will talk a little bit about it 
in brief. We grouped most of the problems that we saw over the 
first year into four rough categories. The first one primarily 
was one that was cross-cutting on transparency. China, by its 
WTO accession commitments, was required to not only publish 
laws and regulations, but have a more open and transparent 
process by which they regulated and legislated. And that, I 
have to say, has been done, in some cases, very well, but, for 
the most part, very unevenly, and, in some cases, not very well 
at all. So that is something that we are very concerned as USTR 
and throughout the administration on this year two after 
accession and looking forward, is trying to ensure that China's 
regulatory process is transparent, that U.S. companies and, 
indeed, all companies, whether they are United States or 
Chinese, know what they are getting into when they embark on 
doing business in China.
    Apart from that systemic concern, there were three major 
sectoral issues or areas that we noted problems with. 
Agriculture, as you noted, was perhaps the most problematic 
area in the first year. We had a tremendous degree of problems 
with China's efforts to regulate biotechnology products, which 
affected our soybean trade to the tune of a billion dollars 
each year. That was something that was a tremendous concern to 
us very early after accession and continues to be not 
completely resolved, but looks to be better resolved thanks to 
a great deal of work by not only the USTR and the State 
Department and Commerce and USDA, but also the White House.
    Aside from biotechnology, in agriculture there are 
tremendous problems with China's administration of its tariff 
rate quota system. That has, I think, primarily affected the 
cotton trade this year, but we can see, for other bulk 
agriculture commodities, whether it is wheat, corn, or others, 
there are significant problems going forward. It is one of the 
highest priorities of the administration in terms of our 
attempts to ensure implementation.
    Aside from that, and as I said earlier, the tariff system 
has improved dramatically, and tariffs have lowered; but, in 
their place, non-tariff barriers have sprung up. We have seen, 
particularly in agriculture, in the implementation of new 
sanitary and phytosanitary measures and inspection 
requirements, which have made it very difficult for some of our 
competitive agricultural products to enter into the 
marketplace. This is something we are working very hard, both 
in Geneva and with our counterparts at USDA and in the Chinese 
Ministry of Agriculture and other ministries, to try to 
improve, and we have had some success. There is, again, much 
work to be done.
    On intellectual property rights, it is hard to overstate 
the problem on IPR in China. It is rampant. It crosses 
everything from DVDs, like the James Bond DVD, to car parts, to 
airplane brakes, to practically anything that you could 
conceivably brand and send out into the marketplace, it is 
being counterfeited or pirated in China. The good news is that 
China's central government is very aware of the issues with 
respect to IPR, very intent on doing something about it. The 
question is, what can they do and when, and what kind of dent 
in the marketplace can you make? They have what appears to be a 
better regulatory process in place and a better framework of 
laws to deal with IPR, but, again, the question is enforcement, 
and that remains the $64,000 question.
    There is a lack of coordination between the judiciary 
branch, the administrative branch, and the legislative branch 
on IPR issues, which really requires a great deal of overhaul, 
and this is something that we have been pushing pretty hard--
again, with some progress. It's difficult when you hear from 
the central government leadership, when they say, ``Yes, we 
recognize we have 99 percent piracy rates in some products. We 
recognize we need to do a lot about this. We are working very 
hard on it. We need your help.'' It is difficult when you are 
facing that kind of lack of pushback. When we at the USTR 
typically deal with what we consider to be a recalcitrant 
country on IPR issues, they tend to say, ``Oh, our IPR is just 
fine.'' China does not say that. They say, ``We know we have 
got lots of problems. We are working hard on it.''
    So I guess the good news is the central government realizes 
the role of IPR in a mature economy, and we need to make 
progress at the local level and in terms of getting the 
deterrent-level penalties necessary to prevent IPR violations.
    On services, another area that Mr. Schriver raised and is, 
sort of, the fourth major area that we have seen problems in, 
there are a variety of issues, not least of which is the high 
capitalization costs for not just financial services, 
insurance, and banking, and non-bank financing for motor 
vehicles, et cetera, but throughout China, and almost every 
sector has high cap rates, and that is really preventing a lot 
of market access of U.S. firms that may not have the capital or 
want to invest the capital necessary to build the book of 
business over time that is required to justify dumping that 
level of capital into China at the outset.
    The good news on that is, we are getting some recognition 
that this is preventing China's growth. We are talking about it 
in Geneva, and that is having some effect, but we have a lot of 
work still to do on that front.
    Aside from that, there are a variety of other areas in 
which agencies in China that have traditionally performed both 
a commercial and a regulatory function have, as they have tried 
to split regulatory and commercial functions aside, they tend 
to bleed into one another, and so the competitor of U.S. 
companies in China is also their regulator. This is something 
that is particularly noticeable in the express courier area. We 
have made progress there. China Post, who is the regulator of 
express couriers, de facto and now de jure, has agreed to, or 
has been instructed to, separate its regulatory and commercial 
functions and have a regulator that has nothing to do with the 
business side of it.
    But again, these are areas where we continue to work. We 
continue to work on every level in government, in the 
administration. We continue to work with every agency in China. 
We continue to work with every province and every municipality 
every chance we get. We will focus on it extensively in Geneva 
at the WTO.
    And the good news is, we are making progress. We rarely, if 
ever, get from China a flat, ``No, we are not going to do 
anything about it.'' And that is the good news. The bad news 
is, we still have not gotten as far as we need to go, 
especially in some of our critical products that we need to get 
in for market access purposes.
    Mr. Chairman and members of the committee, thank you for 
your attention, and I look forward to your questions.
    [The prepared statement of Mr. Freeman follows:]

  Prepared Statement of Charles Freeman, Deputy Assistant U.S. Trade 
Representative, Office of the U.S. Trade Representative, Washington, DC

    Thank you for inviting me to appear before you today to discuss the 
Administration's perspectives on the United States' trade relationship 
with the People's Republic of China and, in particular, the topic of 
China's WTO implementation.

                              INTRODUCTION

    For much of the past two decades, China had been gradually 
transitioning toward a market economy from what in the late 1970's was 
a strict command economy. In acceding to the WTO, China was required by 
the United States and other WTO members to agree to accelerate this 
process of market reform in order to comply with WTO requirements. 
China's WTO accession agreement embodies a set of extensive and far-
reaching commitments on the part of China to change its trade regime, 
at all levels of government.
    Overall, during the first year of its WTO membership, China made 
significant progress in implementing its WTO commitments, although much 
is left to do. Progress was made both in making many of the required 
systemic changes and in implementing specific commitments. At the same 
time, serious concerns arose in some areas, where implementation had 
not yet occurred or was inadequate.
    In December 2002, USTR submitted a report to Congress detailing 
China's WTO compliance efforts, along with the Administration's 
corresponding monitoring and enforcement efforts. Let me give you a 
brief summary of what we found.

                        IMPLEMENTATION PROGRESS

    As expected, the principal focus of China's first year of WTO 
membership was on its framework of laws and regulations governing trade 
in goods and services, at both the central and local levels. China's 
trade ministry, the Ministry of Foreign Trade and Economic Cooperation 
(MOFTEC), reports that the central government has reviewed more than 
2,500 trade-related laws and regulations for WTO consistency. By mid-
2002, it had reportedly repealed 830 of these laws and regulations and 
amended 325 more. It had also reportedly drafted and adopted 118 new 
laws and regulations. Similar reviews are taking place at the local 
level, although the local governments are generally not as far along in 
their review process.
    Beginning early in 2002, China also devoted considerable resources 
to the restructuring of the various government ministries and agencies 
with a role in overseeing trade in goods and services. Some of these 
changes were mandated by China's accession agreement, while others were 
undertaken by China to facilitate its compliance with WTO rules. With 
the recently concluded National People's Congress, we are seeing even 
further restructuring, which should promote WTO compliance.
    Another significant focus for China during the past year involved 
education and training. China embarked on an extensive campaign to 
teach central and local government officials and state-owned enterprise 
managers about both the requirements and the benefits of WTO 
membership, with the goal of facilitating China's WTO compliance. The 
United States and other WTO members, along with many private sector 
groups, contributed substantial technical assistance and capacity 
building resources to this effort.
    As a general matter, China took positive steps to implement many of 
its specific WTO commitments during the past year. It made required 
tariff reductions, to the benefit of many U.S. industries. China also 
began the process of removing numerous non-tariff trade barriers, and 
it continued to improve its standards regime. For the most part, these 
steps were managed without serious incident, and market access for U.S. 
products in the affected sectors has generally improved. Although not 
without problems, China also took the necessary legal steps to allow 
for increased market access for foreign service suppliers in a variety 
of sectors.

                        IMPLEMENTATION CONCERNS

    While the efforts of China's leadership to implement China's WTO 
commitments should be recognized, the Administration also found a 
number of causes for serious concern during China's first year of WTO 
membership.
    One area of cross-cutting concern involved transparency. In 
particular, China implemented its commitment to greater transparency in 
the adoption and operation of new laws and regulations unevenly at 
best. While some ministries and agencies did take steps to improve 
opportunities for public comment on draft laws and regulations, and to 
provide appropriate WTO enquiry points, the Administration found 
China's overall effort to be plagued by uncertainty and a lack of 
uniformity. The Administration is committed to seeking improvements in 
China's efforts in this area.
    Apart from this systemic concern, three other areas generated 
significant problems and warrant continued U.S. scrutiny--agriculture, 
intellectual property rights and services.
    The area of agriculture proved to be especially contentious between 
the United States and China. While concerns over market access for U.S. 
agriculture products are not unique to China, particularly serious 
problems were encountered on many fronts, including China's regulation 
of agricultural goods made with biotechnology, the administration of 
China's tariff-rate quota (TRQ) system for bulk agricultural 
commodities, the application of sanitary and phytosanitary measures and 
inspection requirements. The United States and China were able to make 
progress toward resolving some of these problems, particularly with 
regard to biotechnology. Other problems remain unresolved, however, 
with the most troublesome being China's inadequate implementation of 
its TRQ commitments.
    In the area of intellectual property rights (IPR), China did make 
significant improvements to its framework of laws and regulations. 
However, the lack of effective IPR enforcement remained a major 
challenge. If significant improvements are to be achieved on this 
front, China will have to devote considerable resources and political 
will to this problem, and there will continue to be a need for 
sustained efforts from the United States and other WTO members.
    Meanwhile, concerns arose in many services sectors, principally due 
to transparency problems and China's use of prudential requirements 
that exceeded international norms. Progress was made in 2002 toward 
resolving these concerns, but much work remains to be done.
    In our experience, China's compliance problems are occasionally 
generated by a lack of coordination among relevant ministries in the 
Chinese government. Another source of compliance problems has been a 
lack of effective or uniform application of China's WTO commitments at 
local and provincial levels. China is taking steps to address both of 
these concerns, through more effective inter-ministerial mechanisms at 
the national level, and through a more concerted effort to reinforce 
the importance of WTO-consistency with sub-national authorities. In 
other cases, however, compliance problems involve entrenched domestic 
Chinese interests that may be seeking to minimize their exposure to 
foreign competition.
    When confronted with compliance problems in 2002, the 
Administration used all available and appropriate means to obtain 
China's full compliance, including intervention at the highest levels 
of government. The Administration worked closely with the affected U.S. 
industries on compliance concerns, and utilized bilateral channels 
through multiple agencies, at all levels, to press these concerns. The 
Administration also initiated a regular dialogue on compliance issues 
between USTR and China's lead trade agency, MOFTEC, with the goal of 
bringing all involved Chinese ministries and agencies together when the 
resolution of particular problems warrants it. Where possible, the 
Administration also multilateralized its enforcement efforts, by 
working with like-minded WTO members on an ad hoc basis, whenever 
particular issues have had an adverse impact beyond the United States.

                               CONCLUSION

    Mr. Chairman and members of the Subcommittee, thank you for 
providing me with the opportunity to testify. I look forward to 
answering your questions.

    Senator Brownback. I rarely tell my mother-in-law a flat 
no, either; and yet there are a lot of things that she suggests 
that I just somehow do not get done.
    I am not suggesting China is my mother-in-law or yours, but 
when you were talking about the IPR, and this has been an issue 
around here for a long period of time--you know, I am in 
Beijing, step outside of the hotel, walk about two blocks away, 
and several people are trying to hawk this latest James Bond 
movie to me. At the same time, I go to a restaurant--they 
double concertina wire all the embassies, put extra troops 
around to make sure that no North Korean refugees make it into 
the embassies to get out to be able to go to South Korea or 
somewhere else. And where there is a will, there is a way; and 
where there is not a will, no way is found. And it seems like 
on the IPR issues, China has consistently found no way to do 
this over an extended period of time, to great harm to the 
United States and to businesses and, I think, long-term harm to 
China, as well. But I would hope we could put a lot of pressure 
on them about this.
    Can I ask you, how would you grade, Mr. Freeman, this past 
year's compliance with their WTO agreement, China? If you gave 
them a letter grade, how would you grade their compliance 
overall?
    Mr. Freeman. I cannot really give them a grade. It is, I 
would say, pass, if that is----
    Senator Brownback. You are passing, or they are passing?
    Mr. Freeman. I was hoping to get away with that one, but--
no, I think, in general, they have passed because of the work 
to be done in terms of putting into play the framework of laws. 
That really was not an insubstantial task. And in our view, 
they did a tremendous amount over the first year. Really the 
rubber meets the road in year two and three to see whether 
these laws and regulations that they have put in effect are 
effective. And in our sense, they are working on them, even on 
IPR, but, you know, we are not there yet.
    Senator Brownback. So passing, but no better than that?
    Mr. Freeman. I would hesitate to give them better than 
that. To be honest, it is tough to come out with one solid 
grade. I mean, they have taken something like 400 courses, and 
in some cases they have clearly failed, in some cases they have 
done very well. I have not averaged it out yet, but I am going 
to saying it is passing.
    Senator Brownback. How are they doing on agriculture?
    Mr. Freeman. On agriculture, I have to say in our view, 
their passing grade is in the balance, to be quite frank. 
Market access, specifically under the TRQ system, has been a 
real problem. There seems to be some genuine attempts by 
different agencies within the Chinese Government to maintain 
the kind of non-market environment for agriculture that they 
have exercised in the past. So that is an area that we are 
watching extremely closely.
    Senator Brownback. Bertie, let us run the clock at 7 
minutes. And we have got a vote that is coming up sometime, so 
I want to make sure that Senator Allen has a chance to ask some 
questions before we go over. And we will take a short recess 
and then come back.
    I am concerned that we may not push China quickly enough to 
comply; that in our history we, I think, sometimes have let 
these trade issues simmer for a long period of time before we 
finally decide, OK, we are going to need to bring a WTO case 
against them. And I would urge you not to do that in this case. 
This is too large of a market; the trade between the two 
countries, $150 billion, most of that coming this way. I do not 
know what the imbalance is of the export/import, but I think 
$120 billion of that is probably coming this way and $30 
billion back the other way. You can correct me on the number. 
Do you know what it exactly is, Mr. Freeman?
    Mr. Freeman. That is about right.
    Senator Brownback. We need to be able to get access to that 
market. And the more we push them, the earlier, I think, the 
more likely they are going to be to comply across the board, 
because this is a large trading relationship back and forth.
    I would ask you, though, as well, I hope we do not subject 
our other interests in Chinese diplomacy, Mr. Schriver, and 
subjugate, then, our economic issues here, as well. You have 
noted that China has been a partner on a number of issues, and 
concerning on others, whether it is dealing with Iraq, North 
Korea, nuclear proliferation on the Korean Peninsula, we have 
got a litany of things.
    I would ask you, has China been cooperating as much as they 
can with the United States on the North Korean issue? They are 
the closest partner with North Korea. They have a generally 
open border with North Korea. They have been sending refugees 
back into North Korea against the agreements that the Chinese 
have signed. Have they truly been working with us on dealing 
with North Korea?
    Mr. Schriver. Well, I think we have been very frustrated, 
primarily with the North Koreans and their provocative acts, 
and the Chinese share some of our concerns related to that 
situation. You fall perhaps short of saying they share common 
interests because when we start to talk about what to do about 
it, there is some divergence. And it is difficult to answer 
your question in a precise way, because we do not always know 
what the Chinese are doing diplomatically behind the scenes 
with the North Koreans.
    I think they are sufficiently concerned about the situation 
that they would like to move it in a positive direction, not as 
a favor to us, or not because they see this situation just as 
we do, but because they recognize it is getting extremely 
serious. I think the aircraft intercept really caught their 
attention. So it is difficult to say, are they doing enough? 
Could they do more, because we do not have a hundred-percent 
transparency on what they are doing.
    The issue of refugees is a very serious issue to us. It is 
raised in virtually every setting now when North Korea and the 
nuclear issue is discussed. I just returned from Beijing. I 
raised it in every meeting I had, and we note to them that it 
is important that they meet their commitments. After all, they 
have signed international protocols saying that they will 
cooperate with the U.N. Commission on High Refugees to screen 
these people and find out which ones have legitimate concerns 
about returning to North Korea, and, frankly, that would 
probably be just about all of them, given the conditions there. 
And we have told them that this is an issue that they're not 
going to get a pass on. And frankly, Mr. Chairman, your 
leadership and the leadership of others who have heightened 
sensitivities to this issue is helpful to us in this regard. 
China does care about their international reputation and how 
they are viewed publicly, and they know that people who are 
committed to this issue will not let it go.
    So we need to focus on, No. 1, making sure that we can get 
assistance to the people who do make it across the border. We 
are working with NGOs in that area to provide assistance. We 
need to make sure that China stops the forced repatriation, 
sending people back to those horrible conditions. And we need 
to make sure that China cooperates with the U.N. High 
Commission on Refugees to have a process in place to screen 
these people and help them.
    The way I have put it, and others in the leadership have 
put it, out of all the things we are working on with China, 
some are really in the hard basket. This one is not in the hard 
basket. If they really believe that these are economic migrants 
and people are coming across the border for economic reasons or 
to settle, then greater transparency through the High 
Commission on Refugees would certainly reveal that. And so the 
way we have put it is, this is not a hard one to help 
yourselves on.
    Senator Brownback. Senator Allen, thank you very much for 
joining us.
    Senator Allen. Thank you, Mr. Chairman. Thank you for 
holding this hearing on this very important matter to trade 
opportunities for American businesses, consumers, as well 
hopeful improvements in human rights for the people of the 
People's Republic of China.
    I was listening to your questions, and they are many of the 
same concerns I have. Overall, I would say China, in listening 
to the testimony here and reading the witnesses' testimony, 
compared to 20 years ago, has improved. But if you give it a 
grading scale, it is a pretty low grading curve. It might be 
called ``social promotion.''
    And then there are some areas where they have passing 
grades, and there are others that I think are clear failures, 
even if you are a very lenient teacher.
    The area of the North Korean refugees, that is an abject 
failure. These people are leaving a tyrannical dictatorship, 
and if there are countries, whether it is the United States or 
South Korea, that are willing to take those refugees, allow 
them to do so. Sending them back means they will be killed or 
they are going to be tormented and imprisoned. And that is an 
abject failure.
    I am glad to hear Mr. Freeman talk about intellectual 
property rights. That is an abject failure. Ninety percent 
piracy rates, under the most lenient of all grading curves, 
would be a failure, and I encourage you to keep working. And I 
know there will be other witnesses coming forward in later 
panels who will be addressing it, and it is important for you 
all to ride herd on that. It is important. This is property 
rights. It is not just affecting businesses; it is the artists, 
it affects creation, the research, the development, whether 
that is in business software, whether that is in the recording 
industry, regardless, those are property rights.
    One other area where I see a failure, which was not 
addressed by either of the two gentlemen here, which I wish to 
bring to your attention, has to do with the WTO and 
semiconductor chips. As I understand it, they put a 17-percent 
value-added tax on all semiconductor chips. In the event, 
though, that the chips are fabricated within the People's 
Republic of China, instead of paying 17 percent, I believe they 
get an 11 percent rebate, so they pay 6 percent. In the event 
that they are also designed and fabricated within China, they 
get a 14 percent rebate, or, in other words, 3 percent. To me, 
this seems to be a clear violation of WTO agreements.
    The point is, is that if you are going to have fair trade, 
and I am one who, with a great deal of trepidation, worry, 
concern, so forth, did vote for normal trading relations with 
China, figuring that with technology more people in China will 
be able to disseminate their ideas and have their own 
independent thought not dictated to them by a government. Now, 
I understand they try to curtail that, but ingenuity and free 
minds and human instincts of hating restrictions and limits, I 
figure the creative nature of technology will bypass the 
bureaucrats and the pack-mule mentality of those who want to 
control thought and ideas.
    So when they start doing this with semiconductors, what do 
you all intend to do about what seems to me to be a clear 
violation of WTO rules, insofar as treating semiconductor 
chips, no matter where they are fabricated, whether they are 
fabricated in China, the United States, Taiwan, Korea, what do 
you all intend to do about this? And I will be writing, once 
again, Ambassador Zoellick on this, and I know other Members on 
the House side, on a bipartisan basis, have a great deal of 
concern of this discriminatory tax treatment.
    Mr. Freeman, I will let you, since you are the grader.
    Mr. Freeman. I am not going to give them a grade on this 
one. We have started looking at this issue pretty directly 
recently. This is still a new issue for us. I tend to agree 
with you that, at first blush, there does not seem to be any 
rationale for it according to WTO commitments. But we are 
looking at it. We have raised it with the Chinese. We have not 
had a tremendous degree of success in what we have--in terms of 
getting to acknowledge that there's a problem yet, although 
they have said, ``Oh, well, look at this in the WTO context.''
    You know, our sense is that there is a broad use of the 
value-added tax system to try to encourage different industries 
to set up shop in China. If they are going to use it in this 
manner, though, obviously this raises WTO issues. We are 
looking at this extensively, and I can get you more information 
as we, sort of, develop a final position.
    But I would strongly urge you, at the same time as you 
write to Ambassador Zoellick, to copy our friends in China on 
this, because they need to hear directly from the U.S. Congress 
that this is something that is of concern not just to the 
pencil-necks in USTR, but to other folks in the----
    Senator Brownback. Senator Allen, if I could, just really 
quick--we have been hit with a vote at 3:10. Why do you not go 
ahead with your questions, and then we will go to Senator 
Corzine. I am going to try to run over and vote. I can get back 
before it closes down. If I am not able to, Senator Corzine 
will put us into recess briefly and then I will be right back.
    Senator Allen [presiding]. I will just followup--thank you, 
Mr. Chairman--follow up, but yes I will copy them. You could 
understand why they are doing it. They want to favor those that 
are fabricated and add a favoritism to those that are designed 
and fabricated within China. However, that is not the way that 
WTO rules operate. I guarantee you if we were doing something 
like that in this country, they would be pretty hard on us 
maybe not China, but other countries. So I think it is 
important that if we are going to have faith in these 
organizations in these countries, that they live up to their 
agreements.
    They have made progress. I do not want to just focus on the 
negative. China has made progress. It is better than it was 10 
years ago, 20 years, and significantly better than it was 30 or 
40 years ago, and I do think engagement is a good idea. But 
nevertheless, there is a great deal of improvement that needs 
to be made in semiconductors and intellectual property, as well 
as a few other areas of human rights.
    I thank you. I am going to turn it over to my compatriot 
and colleague and counterpart and everything, Senator Corzine, 
I have to vote, on trying to get more jobs and energy 
independence, on the floor.
    Thanks.
    Senator Corzine [presiding]. Senator Allen, I am glad you 
are not grading my efforts in some of my outside activities in 
DSCC.
    I think this is a truly important topic to be discussing, 
and sometimes with all the other elements that are challenging 
us on the international front, we lose track of--probably 
America's biggest challenge is its relationship with China if 
you look at it in a long-term perspective--a great nation, a 
great culture that certainly is advancing and positively 
competes in many ways and some--I worry about whether it is 
always positive.
    I really have two questions. One has to do with a general 
geopolitical situation today. We saw the Duma in Russia decide 
to withhold consideration of the Moscow Treaty, a treaty that 
passed here 100 to 0. Are there political actions that have 
been an outgrowth of some of the debate with regard to the 
potential for conflict in Iraq, looks quite imminent, in our 
relationship with China that have been brought forward? And I 
apologize if you have talked about it in your opening 
statements, but I have not--I would be curious if you could 
respond.
    Mr. Schriver. If you are asking about something that is 
very similar to that kind of move by Russia to withhold 
consideration of the treaty, I am not aware of any moves by 
China that would fall into that category. They voted in favor 
of U.N. Security Council Resolution 1441. They have 
consistently said Iraq needs to comply with that resolution, as 
well as all previous resolutions. They have urged Iraq to 
disarm and to cooperate. However, they have publicly said they 
are not in favor of the use of force.
    So although they would fall into the camp of wanting more 
time for the inspectors, they, in the end, do not have any 
great affection for Saddam Hussein, are not particularly 
interested in seeing him stay around on the scene. So they have 
indicated that they are not to be an obstacle to us in this 
endeavor, and that is how they've approached it.
    So I am not aware of any moves of retribution or anything 
like that.
    Senator Corzine. And you feel there are no long-run 
implications to these current events to our relationship in the 
evolution.
    Mr. Schriver. Well, you know, I think there is actually 
some good news. The Chinese, as a member of the U.N. Security 
Council, were grateful that we took this issue to the Security 
Council and did not approach it entirely in a unilateral way, 
which was, sort of, the public buzz, that we would do so. China 
has been consulted very closely on these matters. Secretary 
Powell has met with his counterpart--at least he was his 
counterpart until a day ago--five times in about 6 weeks--met 
with him in New York and in Beijing. President Bush speaks 
frequently to former President Jiang Zemin and has already had 
a conversation with President Hu Jin Tao. So I think, through 
this process, although there is not complete agreement on what 
may ultimately be military action, the Chinese are grateful 
that they are being consulted closely, that we have treated the 
U.N. seriously, arguably more seriously than many of the member 
states, because they are willing to let it go the way of the 
League of Nations, perhaps. And the Chinese are happy that we 
have taken that approach and included them, as a great power, 
in looking at these very challenging issues.
    Senator Corzine. And there have been no public statements 
with regard to preemptive strike policies?
    Mr. Schriver. I would have to check the record. They have 
clearly said they are not in favor--that they would like to see 
a peaceful resolution and a diplomatic resolution and are not 
in favor of military action. That is been part of their public 
statement. I would have to check the record and see if they 
mention ``preemptive'' in a specific way.
    Senator Corzine. I would just comment that one of the 
worries that some have expressed and it is a concern of mine is 
that one can use as a pattern, potentially, preemption in cases 
when people feel that they are threatened, and that, therefore, 
might apply in other situations that we would not necessarily 
want another nuclear power necessarily exercising that. There 
have been domino theories talked about among some.
    I want to go to another area, and that really is one that I 
feel more comfortable on the ground on, and that is China's 
trade imbalance, which is spectacular and is growing at rather 
phenomenal rates, at least I would like to grow earnings of a 
company if I were managing at these rates. We are over $100 
billion trade deficit. It has grown about 25 percent since the 
year 2000. How do you assess, how do we look at our trade 
situation? Is there any reason to believe that we are moving 
into a position of changing policies in a way that would lead 
to a different outcome than an exploding deficit that seems to 
be attracting, based on cost advantages, particularly with 
regard to labor, much of the manufacturing of the globe, in 
many ways? If I understand it correctly, a lot of the auto 
manufacturing that previously was in Mexico had gone and is 
moving into China. But have there been steps taken to address 
this imbalance? Do we think there are steps that we need to be 
working on to address something that--I can tell you I was 
given a question to ask you about wire hangers, which happens 
to be a business that is in New Jersey that basically lost its 
reason to be, from a cost standpoint. And I run into this on a 
regular basis across both my own State and as I travel the 
country. I wonder what is the administration's response? Where 
do we think the outgrowth of this will be?
    Mr. Freeman. Well, obviously, when you get up over $100 
billion in a trade deficit, it is a striking number, and it is 
something that we are obviously very focused on. But I think 
the way that we are approaching this, the administration is 
approaching this, is not so much to get worried about what the 
deficit is, but to look at what the growth of the trade 
relationship is, generally.
    What we are looking at is improving market access to China. 
That is what our primary focus is. I think that if we--we are 
certainly not about throwing up new barriers here to reduce the 
competitiveness of our domestic industry. What we are trying to 
do is encourage more growth in China and more purchasing of 
U.S. goods and services in China. And we think that the U.S. 
business person, the U.S. worker, and the U.S. consumer will 
take care of the rest.
    So, you know, our focus is--again, is not so much on 
reducing the deficit for the deficit's sake, but to improve 
market access and improve the growth of Chinese purchases.
    Senator Corzine. Do we think that is happening in the 
banking sector, the capital market sector, the manufacturing 
sector? Do we have specific points where we are--to use Senator 
Allen's analogy, where we could give high marks for the opening 
up of these sectors for export opportunities?
    Mr. Freeman. Well, believe it or not, I mean, in some of 
our agriculture sectors, we have the highest sales of U.S. 
agriculture products into China that we have ever seen. Citrus 
has been a huge, a huge, success story in China, U.S. citrus 
into China. There have been a variety of other products where 
we have seen increasing competitiveness. And very frankly, in 
things like insurance and other U.S. services, we have seen an 
increased access to there. And one of the things that we are 
trying to do is reduce some of the costs of doing business over 
there so that it become easier for more U.S. insurers, more 
U.S. service companies, more U.S. businesses, generally.
    Senator Corzine. You give them high marks for the opening 
up of the financial services industry?
    Mr. Freeman. No, I am suggesting that--I did not mean to 
say that--I am saying that they are getting better. I mean, I 
think it is too early, in many cases, to give them final marks 
on anything. This is a work in progress. And so, you know, we 
are continuing to push very hard on all fronts.
    And again, $100 billion trade deficit is striking. There is 
no way to get around that.
    Senator Corzine. The rate of growth is even more striking, 
a compounded 25 percent growth rate.
    Mr. Freeman. Correct.
    Senator Corzine. A pretty astounding end result.
    I apologize, but the hour is late on the vote, so I am 
going to put us into recess until Senator Brownback comes back. 
I apologize for cutting short. This is a very important topic. 
Fixed exchange rates and a lot of other issues, I think, need 
to be seriously examined if this issue is not to become a 
serious irritant between our two societies as time goes on. And 
while other things are maybe priorities for the moment, this 
may end up having some of the greatest import for one of the 
most important countries in the world.
    Thank you.
    [Recess.]
    Senator Brownback [presiding]. We are sorry for the 
momentary delay.
    Gentlemen, thank you for continuing. I have got just a 
couple more followup questions and then we will go to our next 
panel.
    Mr. Schriver, just a couple of questions. What has been the 
growth of the budget for the Chinese military over the past 5 
years? Do you know what that has been?
    Mr. Schriver. I would resist putting a number on it. The 
Chinese have official statistics, which are about anywhere from 
7 or 8 or 9 percent growth a year. So, even by official 
statistics, the growth has been very significant. I think most 
analysts do not regard those number as accurate and would put 
them somewhere higher. So it is difficult to pinpoint.
    And I think the important point, and one that is not in 
dispute, is the Chinese have been investing heavily in their 
military modernization, mostly directed at Taiwan, mostly in 
the area of ballistic and cruise missile development and 
deployment, and that is of great concern.
    Senator Brownback. Have they increased their spending on 
space programs, as well? Do you know of anything in that 
nature?
    Mr. Schriver. They have. Not only are they pursuing manned 
space launch, it is a goal of the Chinese--I think national 
prestige has something to do with that--but military space 
programs across the board, satellites for communications, 
trying to develop more sophisticated--what the military would 
call C4I capabilities, and some of that is in the area of 
space.
    Senator Brownback. Has this raised any areas of concern or 
alarm at State Department or Defense Department?
    Mr. Schriver. The broader issue of military modernization 
is something we watch very carefully. In terms of space 
programs, we have strict export controls, and we have a history 
there. In fact, we just levied a penalty on a couple of U.S. 
companies involved in cooperation that was outside the law. So 
we are concerned about the developments, and we try to ensure 
that any kind of cooperation with the Chinese does not go to 
People's Liberation Army end-users, or if an item is in the 
area of dual-use, that any transfer does not contribute to 
military modernization.
    Senator Brownback. Is the Chinese leadership in the country 
moving toward democracy across the nation? Can we say that, or 
is that not taking place?
    Mr. Schriver. I think it is a mixed bag. If you want to see 
the glass half full, you would say that there has been a trend 
over many years of increasing village elections at the local 
level, increasing abilities for people to participate in 
choosing their own leaders at the local level. We just saw a 
transfer of power in the National People's Congress, which was 
hardly reflective of a democratic process. So it is a mixed 
bag.
    Senator Brownback. My indications are that--what I have 
been reading is that they are moving toward some sort of 
democratic reforms at the local level, the closest local level, 
and that may be to deal with corruption as much as anything. 
But at the national level, there is no intent, nor movement, 
toward democracy. Would that be a correct bifurcation of the 
situation in China on its movement toward democracy?
    Mr. Schriver. I think that is accurate. Again, if you want 
to be an optimist, you would say that the movements at the 
local levels are a precursor for other things. But, again, what 
we just saw at the National People's Congress was hardly the 
result of a democratic participatory kind of system.
    Senator Brownback. Does any of the Chinese leadership ever 
express to you a willingness to move at the national toward 
democratic governance?
    Mr. Schriver. The Chinese leadership is mostly interested 
in stability, as they define it, and that does not include 
moving in that direction, as far as I am aware.
    Senator Brownback. Mr. Freeman, it seems to me that much of 
the market access U.S. firms get in China is contingent on 
their willingness to take a minority stake in a Chinese 
partner. This is part of China's WTO agreement. And why? Should 
we not have required that the same to China has here, that we 
have access there into their market or into their groups or 
companies?
    Mr. Freeman. Well, one of the things about the accession is 
that it provided for a phase-in, including phase-in of the 
ability of United States and other foreign companies to have a 
greater share of a Chinese company. In fact, it is increasingly 
popular, if not the only preferred way to do business is to get 
a wholly owned foreign entity in China. So, increasingly, most 
of the firms that are doing business in China, foreign firms, 
are wholly owned and moving away from a strict JV, joint 
venture, structure. So we are seeing movement there.
    Senator Brownback. Good. What about pressing them on this 
genetically modified organism case? When would you anticipate 
bringing that or getting some sort of final resolution instead 
of this year-by-year issue? I am concerned that we are 
continuing to sow difficulties in our agricultural markets. You 
mentioned it is about a billion dollars a year in soybeans that 
is being impacted here. When are we going to be able to press 
them to finally resolve that issue?
    Mr. Freeman. Well, it has always been our view that the 
attempts to regulate soybeans, in particular, were uncalled 
for. Most of the soybeans that they have tried to do tests on 
to see if they are food safe or they are environmentally safe 
have been going into China for something like 7 years. So it's 
always been our view that it's a bit of a smokescreen to test 
these products, because any environmental event that would have 
happened, or that could happen, would have happened already. 
These are safe products. We have tested them extensively. They 
have been tested in much more rigorous markets than the United 
States before--excuse me--more rigorous markets than China 
before, and they have always proved safe. So we don't think 
that there's a need to test these products to the extent the 
Chinese are doing.
    That said, what China has done is they have agreed the 
testing of soybeans, in particular, or other genetically 
modified organisms, will not impact trade. So what they've done 
is they've extended now the period for testing, the interim 
arrangements under which soybeans are coming in, and other GMO 
products, until April 20, 2004, which should allow the testing 
to finish and they can officially seal these as safe.
    So, at the end of the day, we do not think we are going to 
see an impact, again, on soybean and other GMO trade into 
China. So that is the good news. We really feel this is one of 
the relative success stories of U.S./China engagement on 
agriculture and economics in particular. But it has not been 
easy, and it has been a lot more adversarial than we would have 
appreciated.
    Senator Brownback. I just want to go back to an earlier 
point and just mention it one more time, is that I think we 
really need to press them early in their WTO process of getting 
in compliance, and early with cases, too, that I think if we do 
that early, we are going to have more success over the longer 
term than if we wait a couple of years and say, well, OK, we 
are going to kind of let it slide a little bit. If you let it 
slide at the front, it is going to slide further at the back 
side of it. And it is just such a large economy and a large 
market force. I really hope you will push them aggressively at 
an early stage.
    I presume that discussion is going on internally now. And 
at what point do you start really pulling the trigger with 
cases against them to get in compliance?
    Mr. Freeman. Well, again, our sense is that when you bring 
a case, because of the time that it takes not only to go 
through the WTO process, but the time to implement the WTO 
solution, it is far better to solve your problems bilaterally 
so that you do not have to go to the WTO and dispute the 
resolution.
    Again, you know, there are a couple of issues--you have 
raised a couple here--where we are farther along in the process 
of throwing up our hands and saying it is time to take a case, 
but this is something that the administration will have to 
decide upon as a whole and not something that USTR on its own 
would do.
    Senator Brownback. And toward the general administration, I 
hope we do not subjugate trade to the broader issues that are 
involved here. I think we should deal with trade issues on 
trade, trade agenda and the broader issues in their field, as 
well, but not tie those two in together.
    Gentlemen, I have two questions that Senator Biden wants to 
submit for the record. And, if you could, I would appreciate 
your responding to them as soon as possible and we will include 
them in the record. Thank you very much for joining us today.
    Our second panel will be Dr. Robert A. Kapp, president of 
the US-China Business Council here in Washington, DC, and Ms. 
Hillary B. Rosen, chairman and chief executive officer of the 
Recording Industry Association of America.
    Dr. Kapp, Ms. Rosen, delighted to have you here. Dr. Kapp, 
we will go with your testimony first. You are free to submit 
your full full statement, into the record and summarize, if you 
would like to, or read your statement, whichever you would 
prefer.

  STATEMENT OF ROBERT A. KAPP, PH.D., PRESIDENT, THE US-CHINA 
                BUSINESS COUNCIL, WASHINGTON, DC

    Dr. Kapp. Thank you very much, Senator Brownback. I am 
delighted to be here. I want to thank you in particular for 
proving just how nonpartisan the US-China Business Council is. 
I have appeared before this subcommittee or the full committee 
at the invitation of members of the Democratic contingent on a 
number of occasions, but this is the first time to be here 
invited by a Republican, and I am delighted to be here.
    Senator Brownback. Good.
    Dr. Kapp. I did present written testimony. It, 
unfortunately, did not get up here until just a few minutes 
ago. It is, I believe, now on the back table, and I would ask 
that it be in the record; I will speak only briefly to some of 
the points I made.
    Senator Brownback. Without objection.
    Dr. Kapp. You know, we meet at an interesting moment. None 
of us needs to be reminded of that. I spent the hours before I 
came over here reading the Federal Emergency Management Agency 
pamphlet ``Are You Ready?'' in order to get ready for my own 
meeting of our small staff to discuss who was going to bring 
the bottled water and who was going to bring the blankets and 
so forth to our office. It is a very strange moment, in which 
Washington is aware of the dangers that the world presents.
    We had an article in the Washington Post yesterday called 
``Pearl Harbor 2003?'' which suggested that the American 
military is now very, very thinly stretched and could be even 
more thinly stretched in the near future, with critical 
implications for our security.
    So as we meet today about China, I guess, on the one hand, 
I feel very grateful to you, Mr. Chairman, and to the 
subcommittee and the full committee, for convening on this 
topic at a when so much else is going on. I think that is 
critically important.
    At the same time, I think the world that we look out upon 
from the windows is one which ought to make us take a deep 
breath and think as broadly as we can about the U.S.-China 
relationship, past, present, and certainly future, as is 
implied in the title of this hearing, implications of China's 
emergence.
    In that regard, I sent to members of the committee and 
staff of the committee--I was unable to make it available fully 
to the press--copies of the brand new issue of our magazine, 
``The China Business Review,'' because it is about the 30th 
anniversary of our group and is filled with articles by 
scholars and members and government figures on U.S.-China 
relationship at 30; what China, itself, will look like 20 and 
30 years into the future. Former Representative Lee Hamilton 
has a very serious and thoughtful piece in here. President 
George Herbert Walker Bush was kind enough to sign his name to 
a greeting at the front. But, taken as a whole, I hope the 
people on the committee will be able to read some of these 
essays, by Chinese as well as American writers, about where 
China is going and where the United States-China relationship 
might proceed in the future.
    I am here as the representative of the US-China Business 
Council, a private, nonprofit corporate-supported organization 
celebrating, as I mentioned, its 30th anniversary. And the 
simple message of the business sections of this testimony is 
that business is growing rapidly. The volume of trade expanded 
very substantially last year, both imports and exports rising 
by more than 20 percent. The trade deficit, as you know, has 
risen significantly, as well. American companies, by and large, 
view China today with a sense of expanded opportunities, and 
that applies not only to big companies. We find that smaller 
companies, who, until now, have viewed China as so mysterious 
and so obscure as to be off limits to people with shallower 
pockets, are now beginning to call us with greater frequency to 
say, ``We would really like to see how we can economically, but 
effectively, maximize our opportunities over there.'' American 
businesses are seeing a China in which a large domestic market 
is clearly in evidence in many, many fields. Autos are the 
classic case that we read about in the newspapers now, with car 
sales going very, very dynamically. But the same is true about 
other familiar subjects. China, the largest cellular phone 
market in the world, with American brands prevalent, or at 
least very highly present. And increasingly, not only in 
Beijing, Shanghai and Canton on the coast, but in the major 
cities of other provinces, as well.
    Broadly speaking, American business views China as still a 
tough place to do business. It has always been that. But anyone 
who has been there for more than a year views it as a better 
place to do business today than in the past. And anyone who's 
been there for 5 or 10 or 15 or 20 years, or who goes back to 
1977, as I do, recognizes that a great deal has moved in 
positive directions, from the standpoint of business.
    We are very supportive of the interest that the Congress 
takes in our trade and economic relations with China, including 
China's WTO implementation process. It is not, I think, 
excessively associating with the Chinese view of the world to 
recognize and acknowledge that what China signed in the WTO 
agreements that it made first with us in November 1999 and then 
in Geneva, with the entire WTO, at the end of 2001, demands of 
China a degree of social and economic and even political 
change--certainly, administrative change--which is very 
difficult for us even to imagine doing, and certainly bigger, I 
think, than anything that any international agreement has 
imposed on the United States at any time. We have tended to be 
the power that has pretty much drawn up the rules. And in this 
case with China, the PRC has accepted a set of commitments that 
are enormously far-reaching and very difficult to accomplish.
    So we support very strongly both the Congress' and the 
Commerce Department's and the USTR's very strong and systematic 
efforts to monitor and watch the process by which China seeks 
to accomplish these huge changes.
    I do have a message for China today. You know, whenever one 
speaks in a meeting like this from a position like mine, one 
understands that the audiences are multiple. And my message for 
China today is an expression of congratulations on the seamless 
transition to a new leadership. It is, by far, the most 
peaceful and nondestructive, noninvasive political transition 
of leadership that we have seen in the history of the People's 
Republic. The people who have taken office are experienced and 
talented. And as I say in my written testimony, the rule of the 
great man is a thing of the past in China. These are well-
turned-out, experience, administratively savvy, sometimes 
internationally adept, professional political leaders, and we 
congratulate them on their accession to their new offices.
    At the same time, as they settle into their new offices, it 
is very important that the WTO implementation process on which 
China embarked so boldly at the end of 2001, not be allowed to 
slip into a side office or--no matter how pressing the domestic 
priorities of a new regime are--be relegated to a secondary 
position. And the reason for that, of course, is essentially 
you, Senator Brownback, and the U.S. Congress, in particular, 
but also the administration and also the American business 
community. The rest of the world cannot wait for China always 
to reach the right moment when everything domestically is lined 
up in perfect order in order to turn to the implementation and 
realization of its international commitments. We think the 
Chinese understand that, and we believe that the Chinese 
leaders who brought China into the WTO against enormous 
resistance--even after they were in, enormous resistance--
understood and that their successors understand that the 
implementation of China's obligations, or realization of those 
obligations, is, in fact, very good for China in the medium to 
long run.
    We also know that they know that they are looking at tens 
of millions of people already laid off from the creaky state-
owned sector, which may go into further decline under the 
pressures of the international community through the WTO. We 
know that they are very, very concerned about the future of the 
hundreds of millions of people on the farms whose products and 
crops are simply not price-competitive and quality-competitive 
with international imports moving into China.
    But our message is, please do not let this drop or let this 
fall to the side. You are only in the second year. There is a 
long way to go. The world and the United States are watching.
    Now, having said that, I have attached to my testimony a 
very short essay which summarizes the testimony that the 
council provided to the Trade Policy Staff Committee 
coordinated by USTR last fall, and there is a very short essay 
summing up our positions, particularly about the salience and 
critical importance of year two, which began last December 11, 
in this WTO phase in process, in the written testimony.
    Beyond that, however, the testimony goes a little further, 
and I want to take just a moment, because of the circumstances 
in which we meet, to make a somewhat broader and a more wide-
ranging argument.
    We have got a new leadership in Beijing. We are not in 
crisis with China. In fact, it is better than that. Mr. 
Schriver in his remarks today made clear how much has 
progressed forward between the United States and China since 
the calming down of the EP-3 affair. Those of us who have been 
in Washington since the mid-1990s can list, as I do in my 
testimony, the hammer blows through which the United States-
China relationship went in 1995, 1996, 1997, 1998, 1999, even 
up to the EP-3, itself. That, for the moment, and hopefully for 
more than a moment, is in abeyance. My hope is that the Senate 
Foreign Relations Committee, and this subcommittee, in 
particular, will act in a sustained, thorough, and engaged way 
to grapple with the fundamental questions of where the U.S.-
China relationship is going to go, before the next crisis comes 
along. We tend to drift from moments of acute interest and 
excitement about China in the American political system to 
moments of almost complete disinterest. I think it is very 
important that this subcommittee and its parent committee use 
the opportunity to really ask some very fundamental questions 
about the United States and China and how we can evaluate our 
own and the other side's mutual areas of interests and mutual 
areas of concern and see about managing those for the long-
term.
    There is an inter-parliamentary exchange now, which 
Congressman Manzullo has taken the lead in impelling forward. 
We hope that more members of the Senate and more Members of the 
Congress, as a whole, will become involved in that.
    What I am trying to say is that we in the business 
community understand that the core of the positive advance in 
U.S.-China relations in the last 15 to 20 years has been an 
economic one. Just look at the magnitude of this economic 
engagement now. We are their number-two trade partner; they are 
our number-four. We know the investment numbers, and so forth. 
But we also understand that if the other dimensions of the 
U.S.-China relationship are not managed carefully and with a 
mutual view toward long-term progress, ultimately the trade and 
economic relationship cannot carry the freight all by itself, 
just as, in the old MFN annual renewal days, we used to feel 
that if trade were cutoff, the rest of the relationship could 
not be held on an even keel, either. The two are intertwined. I 
sympathize, Senator Brownback, with your point about not 
conflating everything and dealing with trade matters as trade 
matters and not hauling in the kitchen sink and mixing 
everything together. But realistically, if the U.S.-China 
relationship, at the level of who we think we are, who they 
think they are, and where we think we are going, is not 
consciously and energetically addressed by both sides, 
including this committee, then I think, over the long-haul, the 
prospects for all of our engagements with China, even including 
this huge economic one, will not be as bright as they could if 
we put the effort into defining this relationship now.
    Without that kind of effort at conscious definition, 
anybody can read the numbers and come up with any conclusion he 
wants. You can read the trade numbers, you can read the 
armaments numbers, everybody can say, you see? I told you so. 
This just proved they are this, they are that. And the Chinese 
do it to us at the same time.
    So what is needed, and hopefully in this committee we will 
find the source of that energy, would be an effort to really 
work, domestically and also across the Pacific, on coming up 
with some clear understandings between the two countries about 
where we really think we are going. Because if we do not do 
that, it can drift into very, very serious, very serious 
conflicts, of a magnitude that make the North Korea problem or 
the Iraq problem, at least potentially, look small, indeed.
    Thank you very much.
    [The prepared statement of Dr. Kapp follows:]

  Prepared Statement of Robert A. Kapp, President, US-China Business 
                        Council, Washington, DC

    Mr. Chairman, members of the Subcommittee:
    Thank you for inviting me to appear before you today.

                            I. INTRODUCTION

    I am Robert Kapp, president of the US-China Business Council. The 
Council (www.uschina.org) was established in 1973. The Council, a tax-
exempt nonprofit business association under Section 501/c/6 of the 
Internal Revenue Code, is the principal organization of American 
companies engaged in trade and investment with China, serving 
approximately 225 leading corporations and firms from its Washington 
headquarters and field offices in Beijing and Shanghai. The Council 
provides a combination of business advisory services, written 
information and analysis (primarily online), meetings and programs of 
all kinds, and advocacy work on public policy issues of concern to its 
broad business constituency, both in the US and in China. The Council 
has long enjoyed productive and close engagement with many Members of 
the Senate and House, many Committees and Subcommittees, and many 
members of Congressional Staff. We welcome such contacts, and believe 
that the Council can provide dispassionate and accurate information and 
perspectives to our counterparts on Capitol Hill, as we do to many in 
the executive branch and to our business constituents.
    The Council publishes the leading magazine on US-China trade and 
economic relations, ``The China Business Review'' 
(www.chinabusinessreview.com). As it happens, the new issue of our 
magazine, celebrating the Council's 30th anniversary, has appeared only 
this week. Most of the article content of this issue, by authoritative 
American and Chinese analysts, deals with the very subject of today's 
hearing. I have taken the liberty of making copies of this issue 
available to members of the Subcommittee, in the hope that they or 
their staff will find them useful in exploring the themes of today's 
hearing.
    I congratulate this Subcommittee for getting an early start in the 
new Congress on the broad subject of US-China relations. China has a 
way of bursting upon the Congressional agenda in times of acute crisis, 
and then disappearing almost without trace from Members' priorities 
when things settle down. This relationship is too huge, and its 
implications not only for America's interests but for the interests of 
world peace and prosperity too significant, for it to be treated in 
this manner. The Senate Foreign Relations Committee and this 
Subcommittee can do the Congress and the nation a major service by 
staying the course on our relations with China, year in and year out, 
hearing the good and the bad, the positive and the negative, and 
placing the US-China relationship into the broadest context of American 
interests and policies worldwide.

        II. US-CHINA TRADE AND ECONOMIC RELATIONS: ``THE DATA''

    It is no secret that our country and China now participate in a 
vast economic engagement that places the US second on China's list of 
trade partners and China fourth on our own. In a year of economic 
sluggishness, US-China trade in 2002 grew rapidly. US figures show US 
exports to China up more than 15% over 2001 the largest and most rapid 
export growth booked with any of our trade partners. Chinese exports to 
the US continued to expand very rapidly as well, and the merchandise 
trade deficit reached unprecedented levels.
    China's economy continued to move ahead strongly, driven by a 
combination of domestic market growth, government deficit spending to 
deter deflationary trends and mitigate reform-driven unemployment, 
stronger than predicted export performance, and strong incoming FDI 
levels. The bulk of China's very large FDI inflows continues to come 
from Asian points of origin, most notably Hong Kong, Taiwan, and Japan, 
with more Asian investment booked under British Virgin Islands.
    Chinese figures show the top six import suppliers to the PRC as 
Japan, Taiwan, South Korea, the US, Germany and Hong Kong, with 
Taiwan's exports to the mainland rising 39% in 2002. China's top export 
destinations continue to be the US, Hong Kong, and Japan, with South 
Korea and Germany running far behind.
    China's total foreign trade grew by nearly 22 percent in 2002; 
exports and imports both rose by more than 20%. China's overall 
positive trade balance of around $30 billion was higher than that of 
2001, about the same as that for 1999, and lower than that for 1997 and 
1998. China's trade with the Asia-Pacific region grew most rapidly. 
Overall, China's top 6 trade partners in 2002 were (in order): Japan, 
the U.S., Hong Kong, Taiwan, South Korea and Germany. Taiwan replaced 
South Korea in the #4 slot, its trade with the PRC rising by 38.1 
percent.
    Exports from non-state-controlled firms rose more than 27%, a sign 
of the growing international activity of non-governmental enterprises 
as China, under WTO, further opens the door to international business 
by domestic firms. Economists have long noted that the non-governmental 
sector of the Chinese economy is far more dynamic and far more 
effective at generating employment than the state sector, but that the 
state sector continues to enjoy far greater access to capital than do 
non-state firms.
    In the first nine months of 2002, 60% of all incoming investment 
came from the Asian region, with the U.S. accounting for 10.5%. Exports 
from FIBs--foreign invested enterprises--accounted for 52% of all 
Chinese exports in 2002, according to Chinese numbers.
    Among the key features of the Chinese economy in 2002 were the 
accumulating evidence of a large domestic market for consumer durables 
and consumer goods, exemplified by the rapid growth of auto sales, and 
the concurrent deepening of income and wealth disparities within 
Chinese society, both on the rural-urban continuum and between the 
heavily advantaged coastal region and the more poorly endowed interior 
and ``rust belt'' regions. One informed observer has argued that 
widespread privatization of housing ownership has had a very powerful 
stimulating effect on China's domestic markets.
    The central government has continued to pour resources into 
infrastructure development--dams, pipelines, modern highway networks, 
telecommunications systems, and so forth--whose economic returns may 
not be immediate. The government (as of today, the new team that has 
just taken high office) faces huge challenges in dealing with 
persistent budget deficits, widespread industrial unemployment and 
rural economic distress, and the twin burdens of adhering to WTO 
market-opening requirements while simultaneously ameliorating the 
economic dislocations that such adherence is widely expected to entail. 
Meanwhile, the vast enterprise of shrinking the role of the public 
authority in the economic and social life of the populace while 
maintaining and even increasing the effectiveness of national authority 
across the length and breadth of China's huge land mass grinds ahead, 
bounded on the one side by the looming danger of excessive audacity and 
on the other by the impossibility of holding back the tide of 
continuing economic reform.
    Faced with the broad range of economic and social challenges merely 
hinted at here, the regime has given strong signals in the past year 
that a stable international situation, including a stable relationship 
with the United States, is an important prerequisite for the domestic 
economic progress on which it must concentrate. For one expression of 
that viewpoint, I commend to your attention the article by Prof. Huang 
Renwei in the issue of ``The China Business Review'' that I am 
presenting to members of the Committee. We expect the heavy focus on 
pressing domestic demands to continue under China's new leadership.

   III. CHINA IN THE WTO: THE ``DATA'' OF A WORK IN ITS EARLY STAGES

    Evaluation of China's ``performance'' in adjusting its 
institutions, laws, and practices to the requirements detailed in its 
WTO accession papers began almost from the day China joined the WTO in 
December, 2001. American businesses, who had played such a significant 
advisory role in helping the government to define the far-reaching 
obligations that the United States insisted China accept if it were to 
be admitted to the WTO, viewed China's entrance into the WTO with 
optimism, in the belief that a China committed to conducting its now-
massive international commerce under rules and dispute mechanisms 
established by the global trading community would prove a more 
congenial and dependable trade counterpart than a China left to its own 
devices outside the framework which governed the conduct of the rest of 
the world's trading nations. That remains their view.
    Partly because China's WTO accession was unprecedented in the 
complexity and detail of its commitments, and partly because of the 
intense political controversy surrounding the PNTR debate in the United 
States, this country has established multiple governmental mechanisms 
for examining China's continuing progress toward full implementation of 
its commitments, not only at the outset of its membership in the WTO, 
but each year for the long period of its phasing in of required market 
openings. The WTO itself has subjected China to annual review of its 
performance as well.
    Thus, the US-China Business Council offered to the Trade Policy 
Staff Committee, coordinated by the Office of the U.S. Trade 
Representative, its preliminary assessment of China's earliest progress 
as a WTO member, in testimony last September.
    I attach an article I wrote at that time, ``WTO: Toward Year Two,'' 
which summarized very briefly the much more detailed analysis the 
Council produced (the longer document is available at the Council web 
site, www.uschina.org, at ``China and the WTO/Public.'')
    We concluded, in essence, that after only ten months of Chinese 
membership in the WTO, it was premature to form sweeping conclusions 
about the extent, the effectiveness, or the forthcomingness of China's 
WTO conformity efforts. We observed that, near the end of the first 
year, the WTO glass was half full, not half empty, primarily because 
China had reduced tariffs on time and in full keeping with its first 
year obligations, had made very extensive efforts to amend existing 
laws and regulations or put new WTO-compatible laws on the books; and 
that the government was clearly involved in a wide-ranging effort to 
introduce the notions and the methods of a WTO-consistent economy to 
tens of thousands of administrators and cadres who were essentially 
confronting an entire new conceptual and administrative universe for 
the first time.
    We noted, as well, however, that the first year had begun to reveal 
a number of emergent problems which demanded resolution in the second 
year of China's WTO membership.
    These included inadequacies in the establishment of the ``tariff 
rate quota'' systems, for both agricultural and non-agricultural 
products; delays in instituting stable import policies on GMO 
commodities; the absence of timely establishment of WTO-required auto-
financing systems; continuing lacunae in the critical area of legal and 
regulatory transparency, despite some examples of noticeable progress; 
the nascent practice of posting excessively high capital requirements 
on new service-sector businesses in a manner that militated against 
international companies' full realization of new WTO-mandated market 
opportunities; manipulation of certain tax practices, notably relating 
to the ``VAT'' or Value Added Tax, in ways that suggested inappropriate 
favoritism toward domestic products; opacity in the critical area of 
trading and distribution rights for foreign invested enterprises; and 
the perennial problem of intellectual property rights protection and 
enforcement.
    We noted, further, that with ``Year Two,'' the process of phasing 
in key Chinese market opening commitments would begin in earnest, and 
expressed the hope that such phase-ins would proceed as smoothly and 
definitively as possible.
    Now, in March 2003, we are moving into the middle portion of ``Year 
Two.'' The United States Government has engaged directly with Chinese 
authorities on a number of the most significant issues mentioned in our 
list of concerns above. China is just finishing a period of political 
transition that began with the Party Congress last November and 
concluded with the end of the National People's Congress on March 18. 
Some of the key Chinese agencies responsible for policies and actions 
central to fulfillment of China's WTO obligations are being 
reorganized, merged, or redirected. A period of uncertainty as to who 
reports to whom and who has the power to do what in the WTO 
implementation realm may be before us; we hope that any such hiatus 
will be short.
    While the US-China Business Council recognizes that ``Year Two'' 
has a long time to run, we are of the view that the months since 
submission of our TPSC report last fall have shown few significant 
advances in China's WTO acclimatization and implementation. As we have 
noted to our Chinese interlocutors many times, time is passing.
    The list of our concerns has changed little since the fall of 2002: 
the TRQ regime, opaque or discriminatory use of technical standards 
whose effect is to block access of foreign products to China's markets, 
continuing excessive capital requirements in most service sectors, 
telecommunications sector licensing requirements, inadequate progress 
on the establishment of trading and distribution rights for certain 
foreign-invested firms, inappropriate use of VAT rebates in a manner 
that discriminates against imported products, the drawn-out GMO 
controversy, the unresolved problem of rampant intellectual property 
abuse--all remain of concern to the Council and its members.
    At the same time, we are well aware that United States agencies are 
receiving rising numbers of requests for protection against Chinese 
imports, both from traditional heavily protected sectors of the US 
economy and from individual makers of products now facing Chinese 
competition in US markets. Further, China itself has developed and is 
now using its own anti-dumping rules and institutions with increasing 
frequency and thoroughness.

        IV. ECONOMIC AND COMMERCIAL RELATIONS: A QUICK SUMMATION

    Taken as a whole, the immense process of economic and social change 
rolls on. China continues to move in the directions that, presumably, 
Americans want to see it go. The economy is very heavily marketized 
now. The profit motive has trumped the planned economy to a degree 
unimaginable a few years ago. The heavy hand of the state has been 
removed from many aspects of Chinese citizens' lives. The Chinese 
government continues to move away from the remnants of the Stalinist 
planned economy, often against entrenched bureaucratic vested interests 
and often at the cost of cutting once-dependent constituencies adrift. 
An important trend gradually moving ahead now is the reduction of the 
stultifying and corruption-ridden but all-pervasive system of 
bureaucratic approvals and licensing in favor of a more equitable and 
routinized system that places fewer obstacles in the path of productive 
economic activity--for Chinese and non-Chinese alike.
    China's domestic market is an established fact of real significance 
to many US firms. Chinese companies and entrepreneurs increasingly have 
assimilated the language and the methods of global commerce. Contrary 
to the familiar portrayal of deluded and befuddled business people 
throwing their money down the drain in the vain pursuit of the mythical 
China market, many of our Council's member companies are doing well 
there, and view China either as a short-term bright spot in an 
otherwise bleak business landscape or as a compelling mid- to long-term 
venue for business development. Smaller US companies are unquestionably 
stirring as well, beginning to see China for the first time as a place 
where they, too, might seriously explore profitable opportunities.
    The economic development of China, including the improved economic 
circumstances of hundreds of millions of Chinese citizens and the 
expansion of the modern Chinese industrial economy--are widely seen by 
American companies as highly positive developments--especially since 
U.S. products are best suited for more advanced economies and for 
consumers with money to spend.
    China has proven, as well, capable of manufacturing a vast array of 
products to world specifications at highly competitive prices, and has 
established itself as a supplier of many manufactured goods to foreign 
markets, including the United States. Clearly, China has become an 
integral component in many firms' global marketing and sourcing 
strategies. This trend is likely to continue.
    This ``emergence,'' as the Subcommittee has called it, of China in 
the world economy is important news for China's trade partners, 
including the United States. And it is this complex mixture of good and 
bad news that leads me to the final section of this testimony.

                IV. THE MEANING OF ``CHINA'S EMERGENCE''

    Mr. Chairman, barring internal systemic crisis such as might arise 
from a collapsing banking system or a catastrophic worsening of China's 
already serious rural and urban social dislocations or from a decisive 
degradation of China's corruption-ridden administrative structures, the 
China whose remarkable trajectory has been the object of world wonder 
and admiration over the past decade is here to stay. While specialists 
vary in their assessments of the fragility of China's economic and 
social stability, most view China's track record over the past twenty 
years, for all its potholes, as very impressive, and conclude that 
China is far from the brink of systemic failure. It would be a very 
risky bet to assume that China is headed back into the weakness and 
global insignificance that the older among us--and the parents of the 
younger among us--used to take for granted.
    China's high-level politics, however opaque they might be to 
Western eyes, still appear demonstrate continuity and ``normalcy.'' The 
transition to new Party and government leadership has been navigated to 
conclusion only in the past few hours. The regime has now passed a 
longer period free of wrenching internal political conflict than at any 
time since its founding. The deep-seated assumption, arising from Mao's 
time, that any leader of China must be a charismatic ``mobilizational'' 
figure is outmoded; China's leaders are educated, administratively 
experienced, technologically literate, and for the most part 
unspectacular. The era of ``Great Man Rule'' is over.
    The regime's stalwarts, like our own still come to their posts from 
overwhelmingly domestic backgrounds. But China possesses a large pool 
of internationally competent talent, in government and increasingly in 
business. The contrast with the situation twenty years ago could not be 
more stark.
    China's international relations are generally stable, especially on 
its borders. Its position in the Asia-Pacific regional economy is 
increasingly prominent and has not caused the economic disaster in the 
region that some observers had predicted; indeed, China's Asian 
neighbors are increasingly interested in building bilateral and 
regional cooperative links with China that might help to assure their 
place in a regional economy heavily influenced by China's trade 
behavior. China is an engaged, generally responsible player in most 
major world bodies.
    The US-China dialogue of the past eighteen months, characterized by 
repeated meetings of the heads of government and near-routine 
consultations at the cabinet level--and, I'm happy to say, by expanded 
Congressional engagement with China--appears to be on a civil and 
respectful course, even when the two nations cannot fully agree. Human 
rights and labor issues continue to rankle, and should not be lightly 
dismissed, but the past year has seen a few hopeful moments, including 
the visit of representatives of the Dalai Lama to China and the release 
of Mr. Xu Wenli. Somewhat amazingly, after the tumult of the period 
from the Lee Teng-hui visit through the Taiwan Strait missile crisis, 
the missile technology brouhaha, and the successive controversies over 
campaign finance, the Cox Commission, Los Alamos, the Belgrade Embassy 
bombing, the Long Beach and Panama Canal questions, and the EP-3 Hainan 
Island incident, US-China relations are said by both sides to be 
``better than ever before.''
    China has, as the title of this hearing suggests, ``emerged.''
    Yet the full implications of China's arrival among the ranks of the 
very significant nations of the world are still, somehow, unexplored. I 
hope the Subcommittee will excuse me for going beyond the narrow 
professional focus of the US-China Business Council for a moment to 
comment on this broader problem.
    The recitation of our business and economic relations with the PRC 
above is a small facet of this larger picture. And there are a number 
of disquieting signs.
    It is common to observe that with the collapse of the Soviet Union 
the ``strategic rationale'' for US-China relations evaporated, and that 
in its absence a plethora of individual issues has tossed US-China 
relations one way and then another.
    Perhaps the ``war on terror'' has re-established that overarching 
commonality of interests needed to advance the bilateral relationship. 
Perhaps not.
    An arms race is underway in the Taiwan Strait, identified by all 
observers as the point of greatest military volatility in US-Chinese 
relations. No matter where one chooses to identify first causes, the 
fact of that military race is undeniable.
    To the alarm of American observers, some Chinese strategic analysts 
paint a portrait of a United States bent on ``blocking'' China's rise, 
constricting its economic opportunities, emasculating its strategic and 
regional military strength, compromising its sovereignty, and 
undermining its political system. The writings of such commentators 
often claim more attention in the United States than the writings of 
those who posit a more cordial US-China relationship as one of the core 
elements of Chinese foreign policy.
    From time to time, American observers find in China a state 
determined to reassert ancient imperial pretensions to world power, a 
regime that takes the United States as China's ``principal enemy'' and 
bends its efforts to ensuring its ability to confound American economic 
and military power.
    Some analysts in China view the United States with alarmed 
uncertainty. They find it difficult to conclude, for example, from the 
recently published National Security Strategy, whether China is the 
real intended target of the American pledge to prevent the emergence of 
any military challenges to U.S. power, or whether the China that the 
United States pledges to work with in a consortium of major powers 
dedicated to eradicating the threat of global terrorism is the 
Americans' ``real'' China.
    Significant bodies of opinion in both countries see conflict 
between the American ``status quo power'' and the Chinese ``rising 
power'' as likely, if not unavoidable. The costs of such conflict are 
not addressed.
    Some powerful voices within the United States see China's 
increasing ability to compete with the developed industrial nations, 
including the US, as a mortal threat to the US economy and thus to U.S. 
national security.
    In spite of the resumption of cordial US-China engagement in the 
aftermath of September 11, with cooperation in the campaign against 
global terrorism as its centerpiece and rapidly growing economic 
engagement as its most visible manifestation, the two nations have yet 
to achieve--or perhaps event to seek--a durable set of understandings 
as to their intentions and their understandings of each others' 
national interests.
    There is no sign of effective dialogue between the two countries as 
to what constitute the legitimate needs and aspirations of both, when 
the two bump against each other. Each side has its list of ``non-
negotiables,'' but there seems little results-oriented communication--
official or otherwise--as to where and how to reach mutually 
satisfactory understandings in areas of latent conflict.
    In the absence of such a consensus over basic goals and mutual 
interests, the ``data'' of this relationship--whether trade numbers or 
facts and figures about weapons deployments--are left to be interpreted 
by believers according to their preconceptions. The fascinating and 
disturbing thing about the entire strategic dialogue, to which our 
trade and economic engagement is from time to time a footnote, is that 
in the absence of US-China communication about the nature of this 
relationship, those who ``know'' out of conviction what the 
relationship is now and must become can all point to the facts and 
figures to prove their points of view. There seems to be little 
concern, moreover, for questions of how the United States and China 
might act purposefully to establish consensus, defuse frictions, and 
reduce the possibilities of major conflict.
    Ironically, the conundrums that China poses for the United States 
today arise from China's growing ability to function in the world as a 
``normal'' nation, and not as the grotesque and demonic state that 
Americans saw with such alarm in the 1950s and 1960s. Surely, with the 
emergence of a country this large, this significant to the future of 
the global commons, this invigorated by a sense of finally achieving 
the elusive breakthrough to prosperity and security, the United States 
and China should be trying with maximum energy to answer the riddle of 
their future relationship.
    China's ``emergence'' is a fact. The world is a different place as 
a result. The United States Senate and all Americans should be asking: 
how are the interests of the United States best secured in this new and 
different world? Should we take China's emergence solely as an 
existential danger toward whose undoing we should bend every ounce of 
American strength? Would that be feasible? What would it cost? Would 
the world be with us? What would it mean to ``prevail''?
    Does China's emergence require that the United States examine its 
own definitions? Can the US and China do more to harmonize their 
interests and their engagements? Are the current fault lines in US-
China relations fixed for all time? Is it even worth exploring these 
questions anew, and more effectively, with China than we have managed 
to do thus far? What might be the dangers in doing so? Is such an 
effort simply beyond the abilities of leaders in two such disparate 
societies to manage?
    I hope that the Senate Foreign Relations Committee and this 
Subcommittee will not avert their eyes from big-picture questions like 
these, Mr. Chairman, for it is in the answers to these questions that 
the meaning of the economic and trade data, the micro-level experiences 
of Americans in business and other walks of life, will emerge to inform 
the thinking of our legislators and policy makers. The work needs to go 
forward in the absence of US-China crisis. I thank the Subcommittee for 
getting started.

     V. A CONCRETE CONCERN: THE ONGOING PROBLEM OF VISA PROCESSING

    Mr. Chairman, before concluding my testimony, I would like to raise 
one very practical and immediate issue, with which I believe the 
Subcommittee and perhaps the full Foreign Relations Committee ought to 
be concerned. The American business community engaged with China has, 
since the summer of 2002, encountered serious difficulties in regard to 
the travel to the United States of Chinese citizens in the employ of US 
firms, or at the invitation of US firms, for legitimate business 
purposes. Many visa applications for business travel have been delayed 
for four to six months, without explanation. Some visa applications 
have been denied, after lengthy delays, again without explanation.
    The press has already reported on a series of cases in which US 
firms have been unable to bring to the United States Chinese citizens 
whose travel to the US is integral to the US companies' achievement of 
valuable sales, implementation of signed sales agreements with Chinese 
customers, training of Chinese personnel in the use of legitimately 
purchased US equipment, or planning of US company business development 
strategies in China.
    The disruption of visa processing appears to be the result of two 
separate US policy thrusts. One aims at strenghtening US border 
security by denying entry to dangerous individuals. The other is to 
tighten access to US-origin technology by augmenting existing export 
controls. The US business community strongly supports improvements in 
border security and understands the need for appropriate export 
controls.
    At the same time, it is clear that any truly effective new visa 
procedures must eliminate, or minimize as fully as possible, the 
unnecessary ``collateral damage'' that the current procedures are 
causing to American companies attempting to function in today's global 
economy.
    Whether the problem lies in the inadequacy of manpower and 
equipment resources for the prompt and predictable processing of visa 
applications, or in the policy definitions and administrative 
guidelines (not transparent to those outside of the relevant government 
agencies) that have occasioned these very counterproductive results, we 
sincerely hope that Members of this Subcommittee will turn their 
attention to the task of remedying these problems and restoring the 
maximum possible level of effectiveness in the visa evaluation process.
    We have worked, as part of a larger coalition of concerned business 
associations and companies, for many months on this issue, with 
representatives of executive branch agencies and with members of 
Congressional staff in both Houses of Congress. The matter appears now 
to reside principally in the newly created Department of Homeland 
Security, with which we hope to establish productive working contact. 
We appreciate, in advance, your willingness to take an interest in this 
matter, and hope we can remain in close contact with you about it.
    Thank you very much.

   [Reprinted from The China Business Review, November-December 2002]

                     The US-China Business Council 

                       Letter from the President

       (Robert A. Kapp, President, The US-China Business Council)

                        WTO: TOWARD ``YEAR TWO''

    The US-China Business Council recently joined other trade 
organizations in offering a detailed analysis to the US government of 
China's progress in adjusting to the demands of its World Trade 
Organization (WTO) membership since it joined the world trading body 
last December. The Council's presentation was part of a multi-agency US 
government process of information-gathering and evaluation that will 
result in an official administration report to the US Congress by 
December 11, the first anniversary of China's accession. (The Council's 
full presentation can be found on the Council's website, 
www.uschina.org.)
    In a brief oral presentation accompanying the written submission, 
the Council summed up its overall estimation of China's WTO progress as 
follows:
    In the starkest of ``glass half full/glass half empty'' terms, the 
Council considers the glass more than half full as the end of the first 
year approaches, thanks to the extensive and highly visible efforts 
China has made in many areas of WTO-mandated reform.
    These efforts included

   Elimination of laws and regulations incompatible with WTO 
        terms and issuance of new legislation and regulations designed 
        to comport with WTO requirements;
   Reduction of China's tariffs to levels pledged in the terms 
        of China's WTO accession;
   Widespread commitment to ``capacity-building,'' or the 
        development of WTO-trained personnel in central and sub-central 
        government agencies, and efforts at public education on the WTO 
        and its implications for Chinese economic and commercial life.

    These developments, we felt, were appropriate ``infrastructure'' 
measures as China turned to building a new economic and commercial 
environment under the terms of its WTO membership. But we went on to 
offer a cautionary comment:
    We perceive, however, a tone of impatience and uneasiness among 
some respected and experienced business observers within China over the 
PRC's accomplishments and intentions in some of the areas which have 
proven most problematic in Year One. Because we are still in ``early 
days,'' American companies have not seen fit to issue, through the US-
China Business Council, stark characterizations at this time, but the 
concerns registered in our written submission require close observation 
and may require additional action.
    The full content of the Council's written analysis, produced by 
Council staff in Washington, Beijing, and Shanghai, mentions several 
examples of worrisome developments--or non-developments--in the post-
accession PRC trade and investment environment. Widely acknowledged 
problems with agricultural tariff-rate quotas (TRQs) and other traded 
goods under quota; the appearance of new procedural obstacles, such as 
opaque registration processes or onerous standards or prudential 
requirements; and the persistence of massive intellectual property 
abuse were a few of the concerns mentioned in the Council's 
presentation. The Council also pointed to signs of an apparent 
inability or unwillingness of some government agencies to overcome 
other bodies' entrenched resistance to thorough WTO implementation.
    In the question-and-answer session that followed, we were asked 
whether any particular year, in the nearly decade-long process of 
China's WTO implementation, was of special concern. We replied that 
Year Two was crucial.
    We suggested that China had appropriately offered unique Year One 
responses to the challenges of the inaugural WTO year: updating its 
legal framework, cutting tariffs, moving toward the kind of 
consultative transparency that the Internet makes so technically 
feasible, and training WTO-competent administrators.
    But as the United States and other WTO members track Chinese WTO 
adjustment in Year Two, they will increasingly raise questions 
appropriate to an ongoing implementation process:
     Will China remedy the acknowledged inefficiencies and 
confusions encountered in Year One? China itself has acknowledged that 
agricultural TRQs were inadequately determined and allocated in the 
first year. There are other significant examples. A second year of 
disappointment on TRQs and these other issues will not be attributable 
to start-up difficulties.
     Will measures that were to have been completed in Year 
One, but that were not, appear decisively in Year Two, and closer to 
the beginning of the year than to the end?
     Will Year Two phase-ins take place on time? Delays in 
effecting these crucial market-opening reforms will pile up in ensuing 
years; prompt delivery on phase-in commitments is essential.
     Will China find the necessary powers of persuasion to 
compel full WTO implementation by recalcitrant central and sub-central 
agencies?
    The process of evaluating China's progress in adjusting to the 
requirements of WTO membership takes place, like everything else in 
international relations, in a broader context. Here are just some of 
the background factors that directly or indirectly relate to the WTO 
implementation process:
     US-China trade continues to expand vigorously, in spite of 
sluggish economic conditions in the United States, Europe, and many of 
the Asia-Pacific economies. First-half 2002 US exports to China were up 
more than 10 percent year-on-year, while Chinese exports to the United 
States in the same period were up nearly 15 percent. China is a 
critically important export market for many US firms struggling with 
deep declines in other markets.
     Foreign investment, perhaps buoyed by the terms of China's 
WTO entry is moving into China at a very high rate.
     China and the United States appear, superficially at 
least, to be getting along somewhat more civilly of late, thanks to the 
``War on Terror'' and signs that the top leadership in both countries 
sees the value of cooperation. Signs of progress on Chinese control of 
missile and missile-technology exports, a series of releases of 
politically sensitive prisoners, and the recent visit to China by 
senior associates of the Dalai Lama are recent indications that 
progress can be made between the two countries. Diplomatic contacts are 
again in high gear, and the network of consultative arrangements 
between the two governments appears to be widening. The presidential 
meeting in Crawford, Texas, suggests a commitment at the top to 
continued US-China engagement.
     The United States is preoccupied with the possibility of 
major war in the Middle East; on top of the response to September 11, 
2001, this preoccupation has deflected the energies of those earlier 
concerned with the likelihood of confrontation with China and has 
become the primary index by which the United States gauges every 
country's positive or negative relationship to the United States. 
Though many observers note that the underlying factors auguring for an 
ultimate clash of interests between the United States and China are 
basically unchanged, it would be hard to conclude today that the 
authoritative short-term American assessment of China is as gloomy as 
it seemed to be in 2001.
     And last but emphatically not least, China is on the brink 
of long-awaited changes in its political leadership, Within the 
Communist Party this fall and within the government next spring. While 
no one expects this leadership transition to result in wholesale and 
radical changes, hope appears much more widespread that new principal 
office-holders will at least permit forward motion to resume and gather 
speed on many policy issues currently perceived to be in suspended 
animation.
    Energetic implementation of China's WTO commitments must be one of 
the vehicles moving forward at full speed after the transition in 
China's political leadership. That China's new leaders will face 
daunting domestic economic challenges is a given: rural-urban 
disparities of income and wealth, East-West disparities, unemployment 
associated with economic transition, looming troubles in the banking 
and securities sectors--each of the major economic challenges facing 
the regime can be portrayed as dangerously susceptible to the 
disrupting effects of WTO compliance. It will take concentrated 
attention by China's new leadership team, and reaffirmation that WTO 
compliance is in China's dear interests, for Year Two to yield decisive 
progress in uncertain areas.
    Immediately after publishing the Council's written USTR 
presentation in mid-September, I heard from a number of knowledgeable 
friends in the Council business community in China. I close with 
portions of one such message.

          If one asks what positive difference WTO membership has meant 
        to foreign business, it would be difficult to point to anything 
        that the Chinese would not have done on their own, except maybe 
        for some tariff reductions; companies that were doing 
        reasonably well prior to WTO accession continue to advance, 
        while companies that faced daunting barriers continue to beat 
        their heads against the wall.
          . . . [China has] feverishly written new regulations and 
        trained thousands of people, and hailed all that as progress 
        toward transparency and rule of law. But in reality there has 
        been little, if any, evidence of the structural change that WTO 
        was meant to trigger. Indeed, I would argue that thus far the 
        Chinese have been busily hijacking WTO rulemaking to further 
        obstruct foreign participation in key sectors, while maximizing 
        the access of their own companies to more liberal foreign 
        markets . . . [such as the United States]. I still think the 
        top leadership embraces not only the letter, but the intent of 
        WTO membership. But too many parts of the regime do not, and 
        the leadership has not demonstrated a firm grip. Yes, there's a 
        big transition taking place . . . [, but there are also] many 
        entrenched interests that we knew opposed WTO. But they can't 
        make excuses--or be excused--indefinitely.
          [Though] I assume your ``glass half full'' characterization 
        was intended to encourage the good guys, I don't think it is 
        accurate.

    It will be up to China, in Year Two, to show this writer and many 
others that my friend's concerns were off the mark American business--
and many in American government--want to be constructive partners with 
China in WTO progress. But in the end, the laws, the regulations, the 
judicial rulings, and the changes in work style that the world is 
rooting for lie in the hands of the Chinese themselves.

                                 ______
                                 

   [Reprinted from The China Business Review, January-February 2003]

                     The US-China Business Council 

                       Letter from the President

       (Robert A. Kapp, President, The US-China Business Council)

   MISSION IMPOSSIBLE: FINDING ``THE BUSINESSPERSON'S VIEW OF CHINA''

    I was asked to speak at a conference on the topic of ``the 
businessperson's view of China.''I will be the only person on the 
program to address this topic. Others will deal with issues of 
morality, national security, media coverage, ideology--the familiar 
panoply of concerns with which Americans frame the US dialogue on 
China. My job is to ``speak for business.''
    Put yourself in my place. What would you do to get your hands 
around that topic?

1. It's always safe to start by defining terms
    Who genuinely embodies ``the businessperson's view of China''? The 
CEO of a multinational corporation, for whom China--no matter how 
important to the company's business--is but one of a million daily 
concerns? How about a Taiwan- or Singapore-born manager of a US wholly 
owned plant in some East China economic zone, working to keep a complex 
production operation running smoothly? Or the American general manager 
of a joint venture, sitting as a minority member on the venture's board 
of directors? Or perhaps a government affairs director in Beijing, 
working to improve the company's communications with Chinese government 
agencies? Or maybe a lawyer with a good American firm and years on the 
ground in China helping clients to do their homework before they sign 
their contracts? What about the head of a security firm responsible for 
digging up reliable, confidential information about the Chinese 
companies and individuals with whom the firm's clients are 
contemplating business relations? Or maybe a logistics person, 
struggling to get goods into China, out of customs, and on to their 
distributors and end-users countrywide? And what about the owner of a 
small US company pondering whether this, finally, is the moment when 
China looks promising enough for him to look for profitable 
opportunities in the PRC? Is there an archetypal ``businessperson's 
view of China'' to be found here?

2. Next, we might read the latest books in English on China's economic 
        and commercial prospects
    These books' message is brisk: China is China, either as it has 
been since imperial times or else as it has been since Mao took it over 
in the late 1940s. American businesspeople are ``innocents abroad,'' 
self-deluding dreamers at best, and cavalier fools at worst, suspending 
their normal tough-mindedness as they guzzle the seductive elixir of 
the limitless China market just as their predecessors did in 
nineteenth-century England and early twentieth-century America. Drunk 
on the ``sheer numbers'' of people in China, these merchants failed to 
notice the difficulties--poverty, barriers of language and culture, and 
logistics--that ultimately sent many of them home disappointed. Today, 
these books suggest, US businesspeople still fabricate a mythical 
cornucopia of commercial triumphs just over the horizon, willfully deaf 
and blind to the evidence that China was, is, and will always be 
impenetrable and immune to their misdirected efforts.
    Focused on China, the writers of these books maintain--if only by 
failing to look elsewhere--that China is unique as a graveyard for 
dashed business expectations.
    They do not ask how overall returns on investment in other 
developing economies compare with those in China.
    Focused on business aspirations, they forget about other Americans' 
dreams--some still very much alive today--of a China with new social, 
political or religious norms based on US or other foreign models.
    Focused on business disappointments in China, they do not mention 
such domestic fiascos as the collapse of the American savings and loan 
sector or the more recent bursting of the dotcom bubble.
    And they certainly do not spend their time on stories of business 
success or wise business planning by American firms.
    We still haven't found the key to ``the businessperson's view of 
China.'' We can----

3. Look at the numbers
    China is awash in numbers and statistics. Maybe the numbers will 
speak for themselves, and a thorough search will lead to an inescapably 
convincing ``businessperson's view of China?''
    But which numbers? China's economic growth since the late 1970s, as 
reported by the National Bureau of Statistics or as measured by 
skeptical foreign economists? The ballooning foreign direct investment 
numbers since 1992 and especially in the past year? The figures showing 
China's foreign trade growth from practically nothing 25 years ago to 
hundreds of billions of dollars today? The statistics on the soaring 
number of mobile-phone and Internet users? The information on 
disposable income levels for China's emergent middle class? The data on 
exploding private ownership of dwellings and autos? There are plenty of 
numbers to suggest that this time around, China has achieved an 
economic takeoff that global business would be foolish not to notice 
and derelict not to factor into its own projections.
    Others' quantifiers are less encouraging. No one outside of China, 
and few inside, who have looked at the financial system have written a 
persuasively rosy picture; many have seen darker visions. Though 
hundreds of millions of Chinese have left poverty behind in the last 20 
years, millions more remain impoverished. The quantitative evidence of 
inequality in wealth and income between cities and rural areas, and 
coastal and interior regions, suggests the intractability of China's 
immense social, economic, and political challenges. Indices of 
environmental degradation can be daunting. The HIV/AIDS numbers are 
only now beginning to see the light of day. And doubts keep arising 
about the reliability of statistics in China.
    So far we've looked at defining our terms, we've read the latest 
books, and we've pondered some of the quantitative signs that could 
help our hypothetical businessperson form ``the businessperson's view 
of China.'' Still, we're not there. Of course, we can also----

4. Take a look around
    It's hard to come away from a visit to many areas of China without 
the sense that the past 25 years amount to much more than a mirage.
    Even as one sighs at the perpetual flow of media stories detailing 
investment bubbles, guanxi-driven real estate scams, or huge, white-
elephant office blocks unrented, the movement and the economic energy 
in many Chinese cities and towns bombards the senses. And by the way: 
What is that huge billboard for life insurance doing above the main 
thoroughfare in remote Kashgar, at the western-most edge of China in 
Central Asia? And how did that sign reading ``Love and Protect the 
Precious Fiber Optic Cable'' wind up alongside the ribbon of asphalt 
running across the endless desert of western Gansu?
    On the other hand, who are those people in tattered clothes camping 
out under bridges on the outskirts of this or that great city and 
scavenging through rubbish piles? Somehow, ``the businessperson's view 
of China'' needs to encompass the vitality and the suffering that are 
part of the China he or she is seeking to ``view.''
    Still on the trail of ``the businessperson's view of China,'' we 
certainly should----

5. Listen to China businesspeople who have lived and worked in other 
        developing countries
    Businesspeople with time on the ground elsewhere in Asia, Africa, 
the Middle East, or Latin America usually have interesting, and often 
balanced, perspectives on China as a business site. Employee 
productivity, human resources, localization issues, systems integration 
capacity, physical security, bureaucratic procedures, transportation 
challenges, intellectual property security, corruption, functionality 
of telecommunications--take your pick. Ask Americans or businesspeople 
from other developed economies how China compares with other developing 
countries such as India and Brazil, which are closest to China in size, 
or South Korea, Taiwan, Indonesia, or Malaysia, among the major Asian 
developing economies. See what these veterans say.
    It also makes sense to----

6. Talk to Chinese friends, in-country and abroad
    What the Chinese think about their goals, their points of pride and 
longing, also provides insights for businesspeople about China, whether 
the ``Chinese friends'' are businesspeople, students, or employees.
    We'll hear exuberance at the electrifying discovery of 
opportunities to succeed in the ``outside world?'' We'll hear fears of 
the overwhelming technical power of the advanced industrialized 
economies. We'll hear bounding hope that China's continued opening to 
international business will bring growth and jobs, exposing the dark 
and protected corners of the old society and economy (and even the old 
politics). We'll hear grim conviction that foreigners' high-tech 
productivity will throw millions of simple Chinese working people out 
on the street. We'll hear familiar sounds about our investment dollars 
making money in China. We'll hear pride in how much has been achieved 
in such a short time; we'll hear sober assessments of how much remains 
to be done.
    All right: we've done our due diligence. To find ``the 
businessperson's view of China,'' we've defined our terms, read the 
books, waded through the numbers, walked around on the ground, talked 
to worldly-wise veteran business expatriates, talked to our Chinese 
friends and colleagues, and maybe even read a little history.
    Can you, in my shoes, now come up with ``the businessperson's view 
of China?''
    If you can, I have a speaking engagement I'd love to have you fill.

                                 ______
                                 

      [Reprinted from The China Business Review, July-August 2002]

                     The US-China Business Council 

                       Letter from the President

       (Robert A. Kapp, President, The US-China Business Council)

                              IN THE HILLS

    American businesspeople, journalists, and politicians accustomed to 
running up and down the East China coast, from glistening boardroom to 
humming twenty-first-century factory floor to the front end of the 
airplane, should take a deep breath now and then and go west, or 
inland--or even just get out of town. It is a refreshing experience, in 
many ways invigorating, and in some ways very sobering.
    I was lucky to have had that chance recently. From a speaking 
engagement in Tianjin, whose famous Tianjin Economic and Technological 
Development Area houses advanced production facilities for some of the 
world's most sophisticated companies, I headed to Sichuan, China's most 
populous province, home to 130 million people.
    In the provincial capital of Chengdu, I passed through a new 
airport that compared splendidly with the new airports of the coastal 
cities. I marveled at the extent of the urban development that has 
swept over this inland provincial capital since the days, 15 or 20 
years ago, when Sichuan was a regular stop on my China itineraries. I 
visited a proud business owner whose brilliantly lit five-story 
emporium sold only high-end furniture and accessories made in Spain. 
Then I hit the road to see things I really hadn't seen before.
    And what a road. Heading north from Chengdu to Mianyang, ``the 
road'' was a gleaming, four-to-six-lane superhighway, perfectly graded 
and paved. When we hit 170 kilometers per hour, my eyes widened, not 
just out of fear, but out of a realization that, until a year or two 
ago, the Chengdu to Mianyang trip was a matter of endless hours and 
frustrations. Mianyang itself; with broad boulevards, beautifully 
tended public spaces, the massive Changhong Electric Co. television 
production facility rolling block after block through town, and a 
booming downtown commercial core, has been firmly ``launched,'' no 
matter how far from the coast it lies.
    On the other side of Mianyang, the superhighway ended, and we 
exited onto another road--National Highway 108, to be exact--which 
connects the great southwest (as far as Yunnan) to the northwest and 
ultimately to Beijing itself. Kilometer posts showed numbers in the 
2,000+ range, the distance to the national capital. Occasionally the 
road could be called two-lane; most of the time it was ``suck-in-your-
gut'' width.
    Now the land heaved up; we entered the foothills of the Qinling, 
the great hill barrier that traditionally isolated the densely settled 
Sichuan Basin from the old imperial capital of Chang'an to the north 
(now the northwestern metropolis of Xi'an), and, indeed, from all of 
North China. We seemed to step back in time. The road was pitted and 
slow, overwhelmed with heavy trucks moving cargoes in and out of 
Sichuan on the only cargo route through the mountains. Country buses 
lurched and swayed, carrying peasants and traders from town to town, 
from county seat to outlying market villages, in this inaccessible 
region. Road maintenance was under way mile after mile--by hand. 
Sunburned men and women shoveled piles of river rock out onto the 
highway, sprinkled shovelsful of asphalt over them, and waited for the 
passing traffic to pack the highway surface. When overloaded trucks 
ruptured their springs, dozens of vehicles waited--with a good-natured 
patience utterly unknown in Washington, DC, I might add--to inch by the 
impasse. I was reminded of the first thing that used to be said about 
Sichuan in the last century: ``Jiaotong bubian''--``Transportation is 
difficult.''
    The countryside was utterly gorgeous. Tiny fields of golden wheat 
alternated with rape or small plots of fruit trees. There were no large 
fields at all, no expanses of paddy, no plains of wheat, soybeans, or 
sorghum. The steeper mountainsides showed wild evergreen and deciduous 
growth. In market towns we passed warehouses where huge sacks of 
Chinese medicinal herbs from the mountainsides are collected and 
traded.
    Roadside signs revealed that we had entered a region of poverty and 
announced programs for local government assistance to the impoverished. 
Aside from our highway, roads were scarce; the hills, bigger than the 
Appalachians but smaller than the Rockies, stretched out in layers to 
the horizon. People living in them walked to town. Yet children heading 
home from school were vividly clothed, their school bags ornamented 
with cartoon animals in bright colors. I wondered if there were other 
children for whom bright clothes--or school itself--were impossible.
    We passed through the great Jianmenguan, a breathtaking narrow pass 
through towering vertical rock faces. We were on ``The Road to Shu,'' 
(as Sichuan was anciently called), formerly a stone track no wider than 
a single person, immortalized in Tang poetry as ``more difficult than 
ascending to Heaven itself.'' Steam poured from the engines of 
overheated trucks on their way up to the pass and out of Sichuan. Then 
we headed down, a racing river just below the side of the road. Now 
steam jetted from the hissing brakes of the heavily laden trucks 
struggling to navigate the twists and potholes on the steep descent.
    By the end of the day, we had reached our destination: Guangyuan 
County Seat, essentially the last stop in Sichuan. The borders of 
Shaanxi Province, and of Gansu Province, gateway to Central Asia, lay a 
few miles further up the road.
    In bustling Guangyuan, I learned from the mayor and his colleagues:
     Urban construction had recently blossomed, much of it 
funded by investors from the uniquely entrepreneurial city of Wenzhou 
in the East China province of Zhejiang.
     The military plants uprooted from East and Central China 
and flung into the inaccessible interior by Mao Zedong in anticipation 
of war with the Soviet Union 35 years ago had picked up and moved out, 
either back east or to more accessible locations.
     I was the second American visitor to Guangyuan in memory.
     There was now a new airport, with daily flights to key 
Chinese cities and connections through Xi'an and Chengdu to just about 
everywhere.
     Everyone was excited about China's World Trade 
Organization (WTO) membership and hoped that it would bring opportunity 
to smaller and more distant communities like Guangyuan.
     Wahaha bottled water (the traveler's friend in the 
scorching Chinese summer) had set up a bottling plant in none other 
than Guangyuan itself--living proof of a bright future!
    But, most staggeringly, I learned that the superhighway that had 
taken me from Chengdu to Mianyang in an hour and a half would be 
completed all the way to Guangyuan by year's end: by 2003, Chengdu 
would be three hours' drive from Guangyuan County Seat. And the 
mountain communities through which we had labored would face a 
different future.
    On the way back to the United States, I read intently about China's 
rural economy and the problems it faces: declining crop prices; rising 
taxes and fees imposed on farmers by parasitic local-level government 
bodies filled with cousins and in-laws ``eating imperial grain'' (as 
they say about those paid with taxes and fees extracted from the 
peasants); rampant usurious lending to these peasants by bottom-rung 
cadres struggling to secure the money that must be sent up the 
administrative chain to meet tax and fee obligations; out-migration of 
millions of rural inhabitants unable to survive on the land and hoping 
for better times in the neon-lit cities and humming factories of the 
coastal enclaves; the difficulty of implementing centrally directed 
economic, political, and social reform in the face of entrenched 
holders of local privilege; and the potential power of modern expose 
journalism. It was a reminder that much remains unsolved in this 
gigantic, fascinating, and sometimes incredibly lovely land.
    For me, living in the world of favorite seats on 747s, busy 
business people, US and Chinese diplomats and government leaders, 
journalists and polemicists, congressional investigators, Washington 
trade diplomats, nongovernmental organizations, human rights 
campaigners, WTO trainers, and US and PRC think tanks, a couple of days 
on the road were more than a pleasant diversion. They were a reminder 
that all of us who engage with China are part of a human drama that we 
can only perceive in fragments, and that what we do in business and 
diplomacy connects to a big chunk of China's life in ways that we'll 
probably never fully grasp. Even so, I have a hunch we all ought to be 
thinking about what's happening outside of town.

    Senator Brownback. I hope, Dr. Kapp, you and your 
association can help us press the Chinese to move toward 
democracy.
    That would be a thing to help us in establishing and moving 
this forward over a longer period of time. While they had a 
seamless transition in leadership, it was certainly not a 
democratic one that they went through. So, your help in that--
you have got great relations there in the country. And I think 
for the relationship between the two countries to really 
maximize over a period of time, it needs to be one democracy to 
another.
    Dr. Kapp. Sir, I know that we need to turn to our second 
witness. Just let me say that if we could have a private 
conversation, I would be happy to discuss some of the ways in 
which I, personally, have attempted to act in that manner.
    Senator Brownback. Good, thank you.
    Ms. Rosen, thank you very much for appearing in front of 
the subcommittee. I have not seen you in a while. Good to see 
you again.

  STATEMENT OF HILARY B. ROSEN, CHAIRMAN AND CHIEF EXECUTIVE 
OFFICER, RECORDING INDUSTRY ASSOCIATION OF AMERICA, WASHINGTON, 
                               DC

    Ms. Rosen. I like being before you in this committee very 
much.
    Senator Brownback. It is a better setting, is it not?
    Ms. Rosen. Much better setting.
    And now I feel like the skunk at the picnic. I want to 
start by saying how humble it feels to be here testifying on an 
issue with such obvious self-interest when we are going through 
what we're going through in this country. So I am incredibly--I 
was moved by what you said about the relationship to the larger 
picture, and obviously grateful for your recognition, in 
particular, of the intellectual property issues as they relate 
to the larger picture.
    My testimony will go on the record. I will just make a 
couple of points, because you have, for so long, demonstrated 
such good understanding of some of the issues that we are 
facing.
    Obviously, I have been involved in issues related to China 
for some time, and during that time there have been good 
developments and bad developments. And I will start with the 
positive.
    In the early 1990s, China was the largest pirate exporter 
of music in the world. There were over 25 domestic CD plants 
when the legitimate market would have been served just fine 
with one plant. It was the will of the U.S. Government and the 
response of the Chinese Government that changed that situation 
dramatically. The Chinese Government instituted regulations and 
enforced laws to change the working nature of those plants. In 
some respects, they shut down more than half of them; and, in 
others, they forced them to go legitimate. That progress 
continues to this day. We do not see a pirate export market out 
of China. It has drifted to other parts in the region, like 
Taiwan, which we will talk about another day.
    But the problem that we face in China now is a great 
problem and one that was left unresolved, I think, by the 
Chinese Government's will those years, and that is really the 
domestic piracy problem. What we have is, as you said Mr. 
Chairman, virtually a 90 percent pirate market for all 
intellectual property goods. That is for us--Mr. Freeman called 
it the $64,000 question--I think we see it more like a $2- or 
$3-billion question, and that will not be resolved until the 
Chinese officials take more steps to meet their TRIPS 
obligations under the WTO.
    Specifically, I will give you some of the things we think 
they have to do. They have to change the threshold laws for 
criminal prosecution. There are procedural hurdles in their 
laws that they need to change. And then once they change those 
laws, they need to appoint some high-ranking--perhaps a Vice 
Premier to be in charge of the anti-piracy long-term 
enforcement. They need an anti-piracy task force within the 
enforcement authorities that is given the resources to do the 
job they need to do. As you said, Mr. Chairman, they seem to 
find police officers to energize the things that they decide 
are important, and we think that they should do it here. 
Finally, looking forward, we think that they should ratify the 
WIPO treaties for the Internet, which would mean adopting laws 
domestically that would implement the WPPT and the WCT 
treaties.
    So there is a lot that they can do. We think that it is 
something that they certainly could do if there was a 
significant will there.
    There is one other issue that I think is worth mentioning 
here which really does affect the domestic piracy situation, 
and that is the market access issues. For our industry, there 
are very strict rules of how foreign record companies can 
access the Chinese market. They have to be done in minority 
stakes with the controlling elements of investment and 
production and distribution, even investment and talent, being 
done by Chinese companies. That obviously limits our abilities 
in several areas. It limits our abilities to work effectively 
with law enforcement on anti-piracy, and it restricts our 
capacity to grow businesses and return moneys for a favorable 
balance of trade, which we think could be somewhere over a 
half-a-billion dollars just for the U.S. record industry.
    But there is a problem here, which is that the market 
access provisions directly are not a violation of their WTO 
obligations. It is simply the effect of them for some odd 
reasons.
    Presumably, the market acts as provisions exist in China 
for the record industry because they want to maintain control 
over content. The Chinese Government has very strict rules for 
foreign sound recordings, and they are subject to significant 
censorship. Any music that is regarded as unsuitable for public 
consumption is rejected. And the Chinese have very tough laws 
punishing offenders for releasing uncensored materials.
    Obviously, this system of censorship would exist if we were 
permitted access to the market. I see the irony in your face, 
Mr. Chairman, as I am having this conversation.
    Senator Brownback. You are tempting me. You are tempting 
me.
    Ms. Rosen. But the problem here is that in China these 
provisions only affect a legitimate market, not the pirate 
market, which is such a dominant source of access for consumers 
that it makes no sense.
    The Rolling Stones are about to go to China. It has been 
well publicized. They are touring in several major cities the 
first week of April. And they have been told not to play 
certain songs in their concert, and the Stones have agreed not 
to play certain songs in their concert.
    The irony is that the pirate versions of all of those 
censored songs are available everywhere on the streets and will 
be sold by the thousands and thousands, maybe even millions, 
the week of the Stones concert. But the legitimate CDs, which 
have those songs deleted, are obviously not going to sell. And 
so they have effectively created the forbidden-fruit aspect of 
the pirate marketplace in a way that hurts U.S. economic 
interests dramatically and obviously puts complete holes in 
their decisions on market access.
    So we are grateful for this committee's interest in these 
issues and hope that, as you convey your concerns about 
intellectual property to the Chinese Government, that market 
access restrictions, as you see them, will also be a part of 
that discussion. Again, while it is not a violation of their 
WTO obligations directly, we think that it significantly 
creates incentives in the pirate market that do prevent their 
ability to be in compliance on their enforcement promises.
    Next month, China is going to host the World Intellectual 
Property Summit celebrating the importance of intellectual 
property for improvement of the condition of society and the 
betterment of man. We are supportive of this conference and 
grateful that China is interested in hosting it and welcoming 
so many foreign visitors. Let us hope that the recognition of 
these issues, though, are followed through in Chinese action.
    And this committee, I think, knows better than most that 
the greatest breakthroughs that we have had in China have been 
when the U.S. Government has been most aggressive, most active, 
and the U.S. Congress as its partner with the administration in 
those times. We have seen it occur successfully in the late 
1990s. We can see that again.
    Thank you.
    [The prepared statement of Ms. Rosen follows:]

  Prepared Statement of Hilary B. Rosen, Chairman and CEO, Recording 
            Industry Association of America, Washington, DC

    Thank you for holding this important oversight hearing. China's 
impact on the US economy is significant, and it is important that 
Congress stay involved along with the Administration to ensure that 
Chinese law and practices continue to evolve in ways that reflect its 
place in the international community, and its international 
obligations. I have been personally involved in working on issues 
related to China for nearly two decades, and can state that there have 
been both good and bad developments over that time. I can also advise 
this Committee that the greatest breakthroughs in China have come 
during the times of the greatest engagement by the US Government. I 
therefore urge the Subcommittee to remain engaged, and to convey along 
with the Administration to the Government of China that it expects 
progress in areas where Chinese practices have lagged. We ought to be 
straightforward with our praise, and with our criticism, because only 
with transparency will we be able to effectively deal with the problems 
of today and tomorrow.
    With that as my guide, let me offer my views on the successes and 
failures that we have witnessed in China over recent years. Let me 
start with the positive. In the early 1990's, China became home to the 
largest concentration of pirate CD plants the world had known. Largely 
financed and operated by Taiwanese syndicates, China amassed over 26 CD 
plants at a time when 1 plant would have had sufficient capacity to 
meet all of China's legitimate needs. These 26 plants produced pirate 
CD's around the clock, almost entirely for export. During these dark 
days, Chinese pirate exports decimated surrounding markets, and we 
witnessed significant declines in markets throughout Asia. In 1996, 
this came to a grinding halt. Faced with the imposition of US sanctions 
to the tune of approximately $1 billion a year, the Chinese authorities 
took swift action, shutting down half of the plants, impounding the 
equipment, and introducing a new licensing regime for the remaining 
plants to create more of a deterrence for future piracy. This plan 
worked, and continues to work. To this day, we have not seen the 
resurrection of an export based pirate industry in China. 
Unfortunately, other countries have picked up where China left off, but 
we leave that story for another day.
    This triumph is not to be underestimated--either with respect to 
the US commitment to address it, or with respect to the Chinese 
determination to resolve it. The fact that this success has lasted is a 
testament to the manifest will of both parties. It is now time, 
however, to turn our attention to the issues that were left unresolved, 
and which continue to be unresolved to this day.
    Simply, and transparently, put, piracy in China for all categories 
of copyrighted materials exceeds 90%. In the music sector, piracy 
hovers at approximately 95%. This is, quite plainly, unacceptable. The 
Chinese Government has itself expressed dismay at these levels of 
piracy--levels that it does not challenge, but it has not organized 
itself, either from a legal or practical standpoint, to do anything 
meaningful about it. Many Chinese officials have undertaken sincere 
efforts to address this, particularly within the Ministry of Culture 
and within Customs, but they lack both the necessary manpower, and 
legal support, to get the job done. As a consequence, Chinese officials 
can, and have seized over two hundred million pirate CDs over the past 
two years--a truly staggering sum, but have not had any impact on 
piracy in China due to the fact that there are no criminal 
prosecutions. This failure is exacerbated by some legal impediments to 
bringing criminal copyright cases, but it is primarily the consequence 
of the lack of will on the part of relevant Chinese officials to pursue 
these cases criminally. USTR and other parts of the Administration have 
been discussing this lack of criminal prosecutions with China for some 
time, and continue to do so, but have yet to see any resolution or even 
any meaningful progress. This is unacceptable, and demands an immediate 
solution. If China does not quickly get a handle on the CD piracy 
issues, then all will be lost as we move to try to address internet 
issues, issues which are already beginning to heat up in China 
notwithstanding the Chinese control over other kinds of content on the 
net.
    Rampant piracy led to an estimated loss of $600 million for the 
recording industry alone last year, with losses for US repertoire 
amounting to about $48 million per annum. The problem, of course, is 
that the profits are so high, and the deterrence is so low. Given the 
lack of criminal prosecutions, and the fact that enforcement manpower 
and resources devoted to combat piracy are clearly inadequate, the 
authorities are in reality, fighting a losing battle. Until China 
modifies its legal system to facilitate criminal copyright enforcement, 
and directs all parts of the enforcement structure to deal with 
copyright matters as a priority matter, China will not be in a position 
to meet its TRIPS obligations to provide effective enforcement. 
Criminal penalties in particular are required by TRIPS as an essential 
element of an effective enforcement regime, and these, as a practical 
matter, are simply lacking in China at the moment.
    Aside from the resource and legal issues impeding China's anti-
piracy performance, there are also the complications arising from the 
fact that foreign record companies are only permitted very limited 
access to the Chinese market. This not only limits our ability to 
partner with law enforcement in the battle against piracy, but also 
restricts our capacity to improve the infrastructure for the 
development of local talent, and for the manufacturing, distribution, 
promotion and sale of legitimate recordings. China has determined, 
consistent with its WTO obligations I hasten, however sadly, to add, 
that it will only allow very limited forms of foreign participation in 
the development of the cultural industries.
    This is a grave error that we hope the Government of China will 
reverse. Presumably, the idea behind limiting our access to the Chinese 
market is the desire to maintain control over the content that reaches 
the Chinese public. While we may or may not agree with this goal, the 
fact remains that it can be upheld while simultaneously permitting us 
much broader access to the Chinese market. All foreign sound 
recordings, whether licensed for local production or imported by a 
Chinese state firm for the Chinese mainland market, are subjected to 
strict censorship. Any sound recordings regarded as unsuitable for 
public consumption are rejected. The Chinese have very tough laws 
punishing offenders for releasing uncensored materials. This system of 
censorship offers more than sufficient safeguards concerning the 
content of cultural materials. Limiting our ability to do business in 
China is unnecessary, and destructive.
    It is also highly instructive to note that if these market access 
provisions are indeed intended to guard against unwanted content, that 
such an objective is completely undermined by the total lack of control 
over piracy. The controls over content affect only US owners and their 
legitimate Chinese partners, but have no bearing on the pirates' 
activity whatsoever. Indeed, the inability to release materials EXCEPT 
in pirate form creates yet an additional competitive advantage for the 
bad guys. There is simply an enormous disconnect in China between the 
indifference and permissiveness shown towards the distribution of 
supposedly ``undesirable content'' on illegal carriers, and the great 
abundance of impediments placed in selling legitimate materials. This 
gap or double standard fuels the vast demand for piracy while ensuring 
that legitimate industry cannot compete. Present Chinese policy 
operates to effectively grant illegal enterprises far greater access to 
consumers than legitimate companies. This must be reversed through the 
significant liberalization of China's restrictive regime so that at a 
minimum, legitimate ventures can operate with at least with the same 
level of access to consumers as pirates.
    At present, almost every aspect of operating a recording company is 
restricted. The basic business of a recording company is to release or 
publish recorded music, whether in physical format such as CDs or 
cassettes, or via transmissions. Chinese investment laws prohibit any 
foreign investment in this scope of business. Therefore our companies 
have to find a Chinese state owned publishing house or company to 
release or publish their recorded music in China, regardless of whether 
there is any company suitable as a partner.
    Record companies need to sign artists, select suitable 
compositions, produce the recordings in a studio, manufacture physical 
products, and distribute these products to the public. Here we can see 
trade barriers erected at every stage in the process. Chinese law 
prohibits us from investing in a company to promote our own artists. 
Chinese authorities only issue permits to production houses wholly 
owned by locals, and allow only a minority stake in joint ventures or 
cooperative joint ventures for manufacture or distribution.
    These trade barriers restrict us from doing business effectively or 
successfully in China, and contribute to the Chinese Government's 
inability to effectively address piracy. We hope that members of this 
Committee can convey to your Chinese counterparts your interest in 
extending the market access of US record companies, and in seeing China 
address its serious shortcomings in connection the enforcement of its 
copyright law through criminal measures. There have been encouraging 
recent statements from Chinese leaders about the need to address the 
overwhelming copyright piracy problem that affects US and Chinese 
creators alike, but these expressions of understanding alone will not 
solve the problem. To meet its WTO obligations, it is essential that 
China immediately commit to a course of action that will materially 
decrease the level of piracy in the Chinese market. In order to achieve 
this, China should closely consider expanding the market access it 
grants to foreign firms so that it will have powerful new allies in 
expanding the capacity to deliver legitimate materials to the Chinese 
public, and in confronting the scourge of piracy.
    In just over one month, China will host the World IP Summit 
celebrating the importance of intellectual property for the improvement 
of the condition of society and the betterment of man. Let's hope, no, 
let's WORK, to translate this recognition of the value of copyright 
protection into meaningful action on the part of the Chinese Government 
to finally address this devastating problem.

    Senator Brownback. Thank you. You know, it just seems to 
me, that you just really have to press the Chinese on these 
issues to get anything going.
    On the domestic cases, you positively noted the export 
piracy has been--much of that has been shut down, but the 
domestic situation is not. Do you know of any, or how many, 
cases the Chinese Government has brought domestically against 
domestic piracy?
    Ms. Rosen. Well, the problem is they have done a lot of 
seizures. Over the last couple of years, we think they have 
probably seized 2 million disks from the pirates, but they do 
not prosecute them because the will of the prosecutors is 
lacking. Also, their laws have very strange thresholds and 
strange provisions that simply guarantee that the prosecutors 
are not going to have the ability to give criminal jail time, 
which is really, as we know with piracy, the largest deterrent.
    Senator Brownback. So you do not know of any cases brought 
against domestic piracy or domestic selling of these pirated 
products in China?
    Ms. Rosen. We do not know of a single case where there is--
one case, perhaps, where there was some conviction, but it was 
short-term.
    Senator Brownback. Out of 2 million disks that have been 
confiscated, one case?
    Ms. Rosen. Yes.
    Senator Brownback. Have you brought this issue up either to 
the Chinese Government or the U.S. Government for a response, 
why have there not been more domestic cases, why have you not 
changed the law so you can prosecute these cases?
    Ms. Rosen. Yes, weekly.
    Senator Brownback. And their response?
    Ms. Rosen. Well, as I think you know, the Chinese 
Government is only so responsive to business. Maybe Dr. Kapp 
has some ideas there. But the domestic Chinese music industry 
obviously has an incentive, as we do, to see more prosecutions, 
and there is just not a response.
    I think USTR has been terrific in pressing these issues, 
and I think they are as frustrated as we are with the lack of 
action on the Chinese Government's part.
    Senator Brownback. So, you bring it up, but there is just 
no response. Does the Chinese Government----
    Ms. Rosen. It is the mother-in-law test. That is my new--I 
love that analogy.
    Senator Brownback. Well, do not tell my mother-in-law. I am 
in trouble, then.
    Ms. Rosen. Good thing this is not on C-SPAN.
    Senator Brownback. What is the Chinese Government response 
to you when you raise this with them?
    Ms. Rosen. Well, the good news is that they acknowledge 
that there is a problem. The bad news is that they are not 
doing anything about it. So I think that we feel like we are 
being ``yessed,'' but we are not being responded to.
    Senator Brownback. My guess is, too, that when you 
represent the entire intellectual property industry here at 
this hearing, but software, movies are as bad, if not worse 
than what the recording industry----
    Ms. Rosen. Absolutely. And in fact I think, for the U.S. 
music industry, we may be the smallest victim on a daily basis 
in terms of overall dollars. Software, video games, films are 
extremely significant. You know, software, I think, is a 
billion dollars of the $2 billion total that we think we are 
all losing.
    Senator Brownback. Mr. Kapp, do you have any thoughts on 
this? I mean, this has been a well-known problem for some 
period of time--of how we should address this?
    Dr. Kapp. Senator, it has. As I start to answer, I should 
say, in case I did not make it clear earlier, that since 
Charles Freeman enunciated the series of serious issues, that 
by the end of China's first year in the WTO, had emerged as 
requiring improvement--agricultural TRQs, intellectual 
property, transparency, capital requirements and so forth--one 
of the reasons that I did not recite those myself was that 
Charles had already done them, and, in a sense, had laid out 
the major list of blocks of concern that USTR and the business 
sector feel very strongly about. So any omission of that list 
from earlier remarks was not intended to de-emphasize those, 
but rather simply not to repeat them.
    You know, the problem in China is that the place is 
evolving in the direction of adherence to universally applied 
laws, but the process is sometimes very slow. We have just done 
a compilation of basic information on all the provinces and 
cities. Even it's with all the little different colored blocks, 
is sort of a symbolic representation of the fact that the PRC 
today has left Stalinism behind to a very significant degree; 
is really not totalitarian by most people's definitions 
anymore; and has given a wider range of latitude of behavior to 
people in their lives in their ordinary communities, much wider 
than was the case 10 years ago, but, at the same time, has a 
problem making its writ stick. It has trouble collecting taxes. 
It has trouble, even when it wishes to, in pushing down on 
local society to do what Beijing says.
    So people like our friends at USTR and people in the 
association, they know. Beijing generally gets it. The people 
in Beijing, the ones who signed the WTO deals, they understand 
the terms, they understand the concepts, they understand the 
benefits. The minute you get, metaphorically speaking, a 
hundred miles out of town, you are into a world where local 
interests play a much, much bigger role. I think Hilary Rosen 
knows this well. If a local party secretary, who has to report 
on whether or not he is keeping unemployment under control 
ultimately to the boss up in Beijing somewhere, if he has got a 
factory turning out pirated materials that keep 250 people on 
the job, he has got a conflict. The law says eliminate piracy, 
and he says, ``I have got to show my boss that I am keeping 
unemployment low.'' I am not apologizing for--it needs to be 
ended.
    The pressure does need to begin with the central 
authorities, I believe, and to be expressed both legally and 
educationally downward throughout the society. We all have a 
role to play in that. I think many American trade associations 
now are contributing positively to a fuller understanding of 
key concepts and of the value of adherence to those concepts at 
the local level than used to be the case. But it is not fast 
enough for any of us, and I do not disassociate myself from 
anything that Ms. Rosen said on behalf of the recording 
industry, or the software and the other creative industries. It 
is a large structural problem.
    Now, years ago, when I was still out in Seattle working in 
a very small organization, one of my friends at a software firm 
in Seattle told me that in those days, and that was before 
China became as big as it was today, the biggest single 
intellectual property abuser that they faced, by value, was 
Germany. And the reason it was Germany was that even though the 
incidence of abuse was lower, the pervasiveness of the computer 
and of the use of software was so great that, in dollar terms, 
Germany looked even worse than China. That was, however, before 
China really took off into the massive electronification and 
digitalization of the economy.
    Senator Brownback. Ms. Rosen.
    Ms. Rosen. I think that that answer, with all due respect 
to Mr. Kapp, was extremely kind, but really too indulgent.
    Dr. Kapp. The whole answer, or just the German part?
    Ms. Rosen. The German part is history, I think. Germany 
enforces extremely well, as far as I can tell.
    Too indulgent for a couple of reasons, because this is not 
a capacity-to-succeed issue in China. We see, before every 
important state visit, that the streets are cleaned up. We see 
that, in 1997, when the Chinese Government thought that the 
future of their bilateral relationship with the United States 
in other issues was at risk, they cleaned it up. They have the 
ability to do this. I fully subscribe to what you said earlier, 
Mr. Chairman, that if we left some of these issues to the 
resolution of the global geopolitical future of China, though 
democracy is an important and laudable goal, that there would 
always be an excuse not to do the thing right before them, the 
problem right before them. Unless all of the issues of the 
relationship were addressed, then why should we bother 
addressing this one? Our experience in this country has shown, 
particularly on issues like trade within bilateral agreements, 
that the more specific we are, the more insistent we are on 
action on specific issues, the better our results are.
    Senator Brownback. Thank you, and I want to thank the 
panel. And I just would mention, Dr. Kapp, as you leave, I work 
with a number of companies that are working in China. Now, that 
is a good thing. And I have seen enormous progress taking place 
in China since the first time I went there in 1984-85. 
Beautiful. Great for the individual life that is there. I am 
very concerned that if they do not continue to--if they do not 
move forward positively on a broad-based agenda, that a number 
of businesses from the West, from the United States, that 
invest there are going to be in a difficult situation if we get 
in a confrontational situation. EP-3, I was glad it got 
resolved. It also sowed a worrying note to a number of people 
that this is not the alliance or partnership that some had 
hoped for. This is still an adversarial relationship, and a 
number did not think that it was. And that's very troubling, 
because we have a number of businesses in the United States, a 
number of businesses in China, that have heavy investment 
there, they have heavy economic relations back and forth, and 
if the progress does not continue to be made on democracy, 
human rights, and the basic, opening up the society, on a free 
press, on military issues, we could really be--we would be 
doing two things that could be very bad. One, we could have a 
lot of investment that is going to be in difficult 
circumstances down the road. Two, we could actually be paying 
for the modernization of a potential adversary in the future. 
And I just really hope that with all the relations that our 
business community has, which are very positive, and that is 
the strength of the relationship now to the United States and 
China, is the business and the economic relationship, that it 
helps move it forward on these other fronts that are lagging, 
that are not moving as aggressively as they need to, and they 
sow very worrisome notes for a lot of people.
    Dr. Kapp. Senator, when you have a minute to look at the 
written testimony, I think you will discover that, in a way, 
you have said better and certainly more briefly what I tried to 
say myself and what I opened with today.
    I do think the business and commercial relationship has 
grown beautifully for many people. It has got a lot of 
problems. There are some businesses who are very unhappy. But, 
by and large, it is become a very, very big enterprise for both 
sides. But it cannot survive in a vacuum, and I think that is 
what you're saying. If the other dimensions of this large 
relationship are not carefully managed with a view toward a 
long-term, you might even say strategic emerging and improving 
of both sides' interest, it will be to the detriment of our 
economic engagement with China, no matter how large today's 
trade volume. You are saying, if these other dimensions are not 
properly--I hate to use that old word, but it requires 
``engagement.'' And I think, again, that you, yourself, from 
what you have said today on this subcommittee by having this 
hearing at the beginning of a new Congress in a period of great 
international tension, are laying the groundwork for the effort 
that needs to be made within our country and bilaterally. I 
hope we can proceed with it.
    Senator Brownback. Thank you very much for joining us.
    Dr. Kapp. Thanks.
    Senator Brownback. The third panel will be Dr. Larry 
Wortzel--he is with The Heritage Foundation in Washington, DC--
and Dr. David M. Lampton, director, Chinese Studies at The 
Nixon Center, Washington, DC.
    Dr. Wortzel, delighted to have you joining us. We will take 
your written statement into the record, and you can summarize 
if you would like.
    I will set the clock at 7 minutes to give you some warning 
about what is going on.

   STATEMENT OF LARRY M. WORTZEL, PH.D., VICE PRESIDENT AND 
  DIRECTOR, THE KATHRYN AND SHELBY CULLOM DAVIS INSTITUTE FOR 
 INTERNATIONAL STUDIES, THE HERITAGE FOUNDATION, WASHINGTON, DC

    Dr. Wortzel. Mr. Chairman, I appreciate the opportunity to 
submit a statement for the written record. I also want to thank 
you for inviting me.
    China is rising as both an economic and a strategic power 
in Asia, and it has great influence over what happens on the 
Korean Peninsula, so it is an important country that cannot be 
ignored.
    It is also important that you hold this hearing, because a 
lot of Americans have been critical that the United States is 
incapable of conducting a war on terrorism around the world; of 
managing disarming Iraq, if necessary, and I think it will be 
necessary; of supporting the democracy on Taiwan; and 
addressing the North Korean nuclear program. The fact that this 
committee is holding this hearing demonstrates the really 
powerful capacity of our democracy to manage a lot of strategic 
challenges in a decisive way.
    China is involved in all these things in one way or 
another. It is a permanent member of the U.N. Security Council. 
It supported--I would say it half-heartedly supported--the war 
on al-Qaeda. It did it for its own interests because it wanted 
to be able to face, I think, a credible internal terrorist 
threat. Beijing supported U.N. Resolution 1441. Since then, 
they have made it clear that they did not support the use of 
force in Iraq. But thanks to French intransigence on the 
Security Council, Beijing did not really have to take a 
position there. They kind of got away with it.
    I think we have very serious disagreements with China over 
the question of Taiwan, the island republic's sovereignty, and 
about American arms sales under the Taiwan Relations Act. But I 
think that there is a common agreement that neither China nor 
the United States right now wants to see that problem resolved 
by force. And I do not think either China or the United States 
wants to see a war on the Korean Peninsula. I think China wants 
to see a divided Korean Peninsula. It does not want to see it 
unified democratically.
    With respect to Korea, senior generals in the People's 
Liberation Army made it clear to me when I was a military 
attache in China that Beijing will not permit the collapse of 
North Korea, and any American attempt to act in North Korea in 
a military way that is not coordinated with China, they say, 
could well result in the situation that we saw in 1950, with 
the involvement of the Chinese military.
    China provides 70 to 88 percent of North Korea's fuel needs 
and roughly 40 percent of North Korea's food needs. There is no 
country in the world that is more capable of putting pressure 
on North Korea than the People's Republic of China. The result 
of that is, I think that Beijing finds itself in a diplomatic 
position that it enjoys because it has got diplomats and 
legislators from Tokyo, Seoul, Washington rushing over to 
Beijing to seek their assistance with the North Korean nuclear 
program. That parade of visitors really puts China at the 
center of a regional issue, and I think the politburo welcomes 
that. At the same time, China's worst fear is probably a re-
militarized and nuclear-armed Japan.
    So this is not as simple a matter as China ignoring their 
proliferation agreements and giving nuclear weapons and 
missiles to Pakistan. They have got a higher stake here. I can 
tell you that there is a debate going on in Beijing about what 
to do, but the people that are calling Americans hegemonists 
are winning this debate. Beijing is not moving decisively on 
what they could do.
    I think that we must continue to attempt to resolve the 
North Korean problem in a multilateral forum. Beijing is 
essentially carrying Pyongyang's water, trying to encourage the 
United States to negotiate bilaterally with North Korea. I 
think to do that would isolate South Korea and would be a 
serious mistake.
    Now, let me talk for a minute--Mr. Chairman, you have 
covered the broad trade statistics. They are in my paper. I am 
not going to cover those again. But I think it is fair to say 
that free trade builds wealth and prosperity for the United 
States and all involved in the fair exchange of goods, and 
China has benefited from turning away from a Stalinist system 
to a market economy. Economic freedom in China has created a 
body of entrepreneurs and of ordinary citizens who have a 
variety of choice about where they live, where they invest, and 
what they buy. At least in the economic sphere, that gives the 
Chinese Communist Party less control over individual lives.
    It is a dictatorship. It is a Leninist dictatorship. I 
think that the Chinese people are quite capable today of 
realizing that if you can pick where you live, if you can pick 
the car you buy, if you can pick where you invest and make wise 
choices in the marketplace, you can figure out who is going to 
be the best elected leader. It is the People's Liberation Army 
and the security forces that prevent that from happening. I 
hope someday we see that change.
    World foreign direct investment flows into China between 
1995 and 2000 were $245 billion, but China did not attract the 
most FDI out of the United States. It went to Hong Kong and 
Singapore. What that tells us is that the rule of law, abiding 
by international rules, are what affects the investor 
community, and I think that is what China realizes.
    I want to emphasize that I support free trade and I think 
we need prudent national security controls on exports. There 
are some areas where the United States maintains a significant 
advantage in technology that has direct military application. 
We should do nothing to make the People's Liberation Army a 
greater threat or to make it more effective at suppressing the 
Chinese people.
    I think that the biggest area where we could come into 
conflict in China is not Taiwan and is not North Korea, but it 
is China's excessive territorial claims and its unwillingness 
to allow the free passage in international airspace and waters. 
The EP-3 incident was an example of that. I find that very 
dangerous. I think we need to work on it.
    I will close with a comment on capital markets. I think 
that Chinese participation in our capital markets is a positive 
thing. Mr. Chairman, anybody that gives you a straight-line 
prediction about where China will be in 20 years is making it 
up. The United States policy is about right. We ought to 
encourage reform, and we ought to anticipate a China that has 
an educated populace, a productive work force, and a nation 
that operates in a world of rules. But we have got to handicap 
the potential outcomes, and I would give that outcome about a 
two or three in five. We could see a collapsed China with a 
floating labor population tearing the country apart, or we 
could see an emerged Chinese state that will have a powerful 
coercive military that threatens its neighbors and the United 
States. So while we embrace the possibilities that lead toward 
that first outcome, we have got to maintain our military edge 
and the ability to defend American interests in the event of 
the latter outcome.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Wortzel follows:]

   Prepared Statement of Larry M. Wortzel, Ph.D., Vice President and 
      Director, The Kathryn and Shelby Cullom Davis Institute for 
             International Studies, The Heritage Foundation

    The Heritage Foundation is a public policy, research, and 
educational organization operating under Section 501(C)(3). It is 
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the United States. During 2002, it had more than 200,000 individual, 
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Individuals--61.21%
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A list of major donors is available from The Heritage Foundation upon 
request.
    Members of The Heritage Foundation staff testify as individuals 
discussing their own independent research. The views expressed are 
their own and do not reflect an institutional position for The Heritage 
Foundation or its board of trustees.
    Mr. Chairman and distinguished members of the Committee, thank you 
for inviting me to address the regional factors related to China's rise 
as an economic and strategic power in East Asia. With respect to the 
security problems on the Korean Peninsula, China is a prime actor. More 
broadly, China's economic growth, its military capacity, its industrial 
strength, and its entry into world economic markets challenge its 
regional neighbors and the United States.
    Today's hearing comes at a critical time for the American people as 
well as America's friends and allies. Some Americans have opined that 
the United States cannot keep its focus while it conducts a war on 
terrorist organizations, stands ready to disarm Iraq, continues to 
support the democracy on Taiwan, and addresses the problem of the North 
Korean nuclear program. The very fact that the Senate Foreign Relations 
Committee is holding this hearing demonstrates the powerful capacity of 
this democracy to manage multiple complex strategic challenges in a 
mature and deliberative, yet timely and decisive way.
    China is involved in all of these issues in one way or another. As 
a permanent member of the United Nations Security Council, Beijing gave 
half-hearted support to the war against al-Qaeda and the Taliban in 
Afghanistan. Beijing also professes support for the long-term war on 
terrorism, believing that it faces its own internal Islamic separatist 
terrorist threat. With respect to Iraq, while Beijing supported United 
Nations Resolution 1441, the Chinese leadership made it clear that it 
did not support the use of force in Iraq, but French intransigence 
permitted Beijing to avoid taking a position in any subsequent vote. 
Over Taiwan, the United States and China disagree about the question of 
that island republic's sovereignty and about American arms sales under 
the Taiwan Relations Act; but it is fair to say that neither Beijing 
nor Washington wants to see the question of Taiwan's relationship to 
the communist government of China resolved by force. Neither the United 
States nor China wants to see a war on the Korean Peninsula. I believe 
that China would prefer to see the Peninsula divided and loathes the 
idea of a unified and democratic Korea.
    Let me address Korea first and then turn to economic and other 
regional security factors.

                          THE KOREAN PENINSULA

    Developments on the Korean Peninsula have worked to increase 
Beijing's political influence in the region. During the years I worked 
as a military attache in China, the senior generals of the People's 
Liberation Army made it clear that China would not let North Korea 
collapse. I was consistently told that in the event of a major crisis, 
war, or collapse in North Korea, China must be consulted on any 
military action to be taken. Three senior generals who fought against 
the United States in the Korean War stated that if U.S. forces had to 
stabilize a collapsed North Korea or move into North Korea to fight 
there again, and those forces approached the Chinese border without 
consulting with Beijing, it could force the Chinese military to enter 
into Korea as the PLA did in 1950.
    China provides somewhere between 70 percent and 88 percent of North 
Korea's fuel needs and between 30 percent and 40 percent of North 
Korea's food needs. Secretary of State Powell has given a range of 
figures for China's support for North Korea, as have other U.S. 
officials. The figures I cite are from the former defense minister of 
South Korea. It is clear that the statements of Chinese generals that 
Beijing will not permit North Korea to collapse are correct. Moreover, 
the magnitude of this aid means that the People's Republic of China is 
probably the country with the most influence over North Korea. 
Unfortunately, Beijing seems unwilling to pressure North Korea to end 
its nuclear program.
    I believe that the leadership of China finds itself in a position 
that it enjoys. Diplomats and legislators from Tokyo, Seoul, and 
Washington are rushing to Beijing to seek assistance in ending the 
North Korean nuclear program. This parade of visitors puts Beijing into 
a central position on regional issues that the Chinese Communist 
Political Bureau must relish. Moreover, the fact that China's nuclear 
proliferation to Pakistan has been more or less accepted by the United 
States means that Beijing has managed to undermine a major pillar of 
American foreign policy--the non-proliferation regime. The situation 
with North Korea is more delicate than that in Pakistan, however, 
because Beijing fears that a nuclear-armed North Korea could drive 
Japan to abandon its peace constitution and even to consider expanding 
its military capabilities to include nuclear weapons and delivery 
systems. Centuries of animosity and war between Japan and China have 
left deep clefts between the two countries. The last thing Beijing 
wants to see is a re-militarized Japan. United States diplomacy must 
emphasize to Beijing the potential consequences of failing to stop 
North Korea's nuclear program, and of China's proliferation behavior.
    The senior leaders of the Chinese Communist Party continue to 
support the negotiating position of North Korea in dealings with the 
United States. Both Pyongyang and Beijing insist that the only way to 
resolve the diplomatic and security dilemma is direct negotiations 
between the United States and North Korea. Seoul also prefers to see 
direct U.S.-North Korean talks. I believe such an approach would be a 
mistake. Any solution to the nuclear program in North Korea must be 
multilateral. The same is true for North Korea's economic problems.
    The 37,000 U.S. troops in Korea are part of a United Nations 
Command. The U.S. fought in the Korean War and negotiated the armistice 
ending the fighting on the Peninsula on behalf of the United Nations. 
The International Atomic Energy Agency, the body charged with 
monitoring the North Korean nuclear program, is a United Nations 
agency. Russia, Japan, South Korea, China, and the United States all 
have a stake in any outcome in Northeast Asia. The Korean Energy 
Development Organization, or KEDO, which provided heavy crude oil to 
North Korea under the 1994 Agreed Framework, is a multilateral 
organization. Finally, bilateral United States talks with North Korea 
only serve to isolate South Korea and freeze Seoul out of the 
settlement of the security threat it faces.
    An interesting facet of the 1953 Armistice ending the fighting on 
the Korean Peninsula is that South Korea refused to sign and has not 
signed to this day. Instead of arguing for the United States to 
negotiate bilaterally with the North, Seoul should begin its own talks 
to finalize that armistice. Ending the state of war on the Peninsula 
would open the way for a wider round of regional talks about trade and 
economic development for North Korea if it verifiably ends its nuclear 
program.
    All of the nations involved on the Korean Peninsula recognize that 
North Korea must resolve its food and energy needs, as well as its 
economic problems. Pyongyang must do this by reforming its Stalinist, 
command economy; changing its military-first policies; and ending the 
use of blackmail to gain concessions from its neighbors and the world. 
There should be no help for North Korea, however, until Kim Jong-il 
meets the obligations he has to South Korea and end the nuclear 
program.

                    FREE TRADE AND NATIONAL SECURITY

    Free trade builds wealth and prosperity for the United States and 
all involved in the fair exchange of goods. China has benefited from 
turning from a Stalinist, centrally planned system toward a market 
economy, as have the Chinese people. The increase in economic freedom 
in China has created a body of entrepreneurs and ordinary citizens who 
have a variety of choices of where they live, how they invest, and what 
they buy. This means that the state and the Communist Party have less 
control over major aspects of the lives of China's citizens.
    China's turn to a market economy has produced consistent economic 
growth for the country. Its economic standing in Asia has given Beijing 
political influence in the region, and China's trade with its neighbors 
has grown rapidly. According to recent estimates, China's gross 
domestic product today is $1.1 trillion. The future growth rate for 
China's gross domestic product is expected to be between 7 percent and 
9 percent, according to the Economist Intelligence Unit. Regionally, 
only Vietnam is expected to have that potential with a future growth 
rate of 7 percent. Japan is projected to have a future GDP growth rate 
of only 0.7 percent. The Taiwan Institute of Economic Research (TIER), 
a major private think tank on the island, on November 7, 2002, revised 
its 2002 economic growth forecast for Taiwan slightly downward to 3.05 
percent from 3.09 percent. Singapore's economic growth is expected to 
reach 3.1 percent in 2003 and accelerate to 5.1 percent in 2004, 
according to the February 10, 2003, issue of The Economist.
    China's merchandise exports grew 301 percent between 1990 and 2000, 
greater than the rest of Asia except the Philippines, where exports 
grew at a rate of 391 percent for the same period. China is attracting 
needed capital and export markets away from its neighbors. World 
foreign direct investment (FDI) flows into China between 1995 and 2000 
were about $245.1 billion. For Hong Kong and China combined, investment 
flows reached $377 billion. By comparison, for the same period South 
Korea only attracted $33.1 billion in FDI, Singapore $52.1 billion, and 
Malaysia $31.3 billion, according to the July 2002 Report to Congress 
by the U.S.-China Security Review Commission. However, China did not 
attract the most U.S. FDI for the same period. China received $6.8 
billion while Japan attracted $21.4 billion, Hong Kong $13.7 billion, 
and Singapore $13.4 billion.
    The lesson for Beijing here should be clear: American capital--
Western capital in general--flows to nations with stable legal systems, 
the rule of law, strong property rights, and transparent banking and 
financial systems. That is the lesson of The Index of Economic Freedom, 
published annually by The Heritage Foundation and the Wall Street 
Journal. It is an outcome that supports United States policy goals in 
trading with China: the creation of a market economy, increased rule of 
law, and a China that functions in the world abiding by rules-based 
behavior.
    I believe that American trade with China benefits the United 
States. Such trade creates and supports American jobs. At the time that 
trucking unions demonstrated against permanent normal trade relations 
with China, in 2000, about 40 percent of the shipping containers that 
passed through the port of Seattle, Washington, contained goods bound 
for or being imported from China. Those containers translate into 
American jobs.
    Competition in the marketplace creates an environment in which 
industries must innovate and transform themselves or face obsolescence. 
Corporations and whole sectors of industry revitalize themselves in the 
face of fair competition. That said, there are prudent reasons for 
national security controls on certain exports where some goods are 
withheld from the marketplace. If a nation poses a direct threat to the 
United States or its allies, or if its security policies pose a latent 
threat, it is prudent to restrict the sale of military goods to that 
country. This is the case with China, especially because of China's 
explicit threats against Taiwan. Also, given the history of the use of 
the Chinese People's Liberation Army to suppress the democratic 
movement in the 1989 Tiananmen Massacre, there is no reason the make 
the Chinese military a more effective force.
    With respect to dual-use items--those with both military and 
civilian application--I would encourage a careful examination of 
licenses with increased end-user verification as well as pre- and post-
license checks. Where the United States is the world's unique possessor 
of technological and manufacturing capabilities with clear military 
application, there are prudent reasons to control the licensing of such 
technologies or capabilities.

                           REGIONAL SECURITY

    The United States and the People's Republic of China share a number 
of common national interests. Both nations seek a peaceful and non-
nuclear Korean Peninsula; both seek to stop international terrorist 
organizations from disrupting commerce and their respective ways of 
life; both work to end international trade in drugs and persons; and 
both want to see a stable environment where trade flourishes, creating 
economic growth. However, there are still a number of areas of serious 
disagreement between China and the U.S. The resolution of how the 
democratic Republic of China on Taiwan and the Communist government of 
the People's Republic work out their differences on Taiwan's 
sovereignty is a major area where Washington and Beijing disagree. 
China refuses to renounce the use of force to bring Taiwan under its 
control.
    I do not believe that is the most volatile policy difference 
between the U.S. and China, however. In my view, it is Beijing's 
expansive interpretation of its own territory that can lead to 
conflict, as demonstrated by the confrontation over how China handled 
the peaceful passage through international airspace by a United States 
EP-3 reconnaissance aircraft in April 2001. China's insistence in its 
own territorial laws that it controls airspace and the sea out to 200 
miles, the Exclusive Economic Zone, is an interpretation of the Law of 
the Sea that the United States cannot allow to stand, or the right of 
free passage of vessels and aircraft for free trade will be impeded. 
Moreover, China's expansive claims in the East and South China Sea 
compete with those of Japan, Indonesia, Malaysia, the Philippines, 
Brunei, and Vietnam. China is building the type of military to back up 
those claims with credible force and to deny the United States the 
flexibility to operate its own forces in these areas.
    China's military buildup is not a challenge to American military 
superiority, but it is worrisome because of Beijing's history of using 
the military to reinforce its expansive territorial claims. Japan's air 
and naval capabilities are purely defensive, but the Japanese Self-
Defense Force's technological and equipment capabilities far outstrip 
those of China. The single exception to this is in the area of 
ballistic and cruise missiles. China has developed a strong ballistic 
missile force and is modernizing its long-range missiles to be mobile 
and armed with multiple warheads. Today, both the United States and its 
allies, especially Japan, are without ballistic missile defenses. 
Because of China's modernization, and the threat from North Korea, the 
early development and deployment of ballistic missile defenses is 
critical to security in the Asia-Pacific region. Beijing is also 
building (and buying from Russia) a dangerous force of land attack and 
anti-ship cruise missiles. Cruise missile defense requires improved 
radar, but the basic defensive systems are already in the American and 
Japanese military inventories.

                CHINA'S PRESENCE IN U.S. CAPITAL MARKETS

    Chinese state-owned companies and the Chinese government have 
raised an estimated $20 billion over the past decade from international 
bond offerings, according to the 2003 Report of the U.S.-China Security 
Review Commission. They have raised more than $40 billion in 
international equity markets over the past decade, with over $14 
billion coming from initial public offerings in U.S. capital markets in 
the three years preceding the publication of the commission report. 
Some argue that such actions by China raise capital that supports 
Beijing's military expansion. Indeed, it is very difficult to tell 
which Chinese entities are related to or wholly owned by the People's 
Liberation Army. It is prudent to deny known Chinese entities that 
engage in proliferation access to the U.S. markets. The Securities and 
Exchange Commission should require foreign companies to file 
registration statements electronically, should review such filings to 
see whether the companies are subject to U.S. sanctions, should seek 
information from filing companies about their business with U.S.-
sanctioned countries, and should share such information with the 
Treasury Department.
    In general, I would argue that China's investment in the United 
States, like the trade between China and the U.S., represents a tool of 
influence in the economic relationship between the two countries. 
However, the United States should not close its capital markets and 
must exercise caution in denying Chinese firms access to the markets. 
One discussion in which I participated with those who proposed to keep 
Chinese companies from trading with the United States suggested that 
any Chinese entity that produces goods for military use should be kept 
from doing business in the United States. Such an approach is foolish 
in my view and would lead to a response against American companies, 
hurting U.S. economic interests. Chinese industries are increasingly 
producing goods for both civilian and military markets. They function 
like major American conglomerates. Should a U.S. company be penalized 
because it produces both toasters and military radar? I think not. In 
the case of China, if it is a clandestinely owned PLA company, that may 
not be the case. But Chinese firms, even state-owned firms, ought to 
get equitable treatment if they operate in the marketplace according to 
SEC rules.

                     CHINA'S FUTURE ECONOMIC GROWTH

    China could turn into the second largest trading nation in the 
world by the year 2020 with a per capita income equal to that of the 
Republic of Korea or Portugal today, according to the World Bank's 
China 2020 report published in 1997. Should China focus on being a 
trading nation rather than a major military power, and reform its legal 
and financial institutions, this outcome is feasible. However, China 
faces huge problems that will only be exacerbated when it finally 
complies with its obligations as a member of the World Trade 
Organization. Today, about half of its state-owned companies are not 
making a profit. No one knows how many of the loans out from Chinese 
banks are non-performing, but the rate may be around 46 percent. There 
are some 140 million agricultural workers who are unemployed or 
underemployed and floating around the country looking for work. The 
World Bank expects that to grow to 200 million people. The Chinese 
state is failing to deliver health care and education to its people, 
demonstrating the bankruptcy of the Communist Party and undermining its 
legitimacy.
    Anyone who gives a straight-line prediction about where China will 
be in 20 years is making it up. United States policy is about right--to 
encourage reform and to anticipate a China that has an educated 
populace, a productive work force, and a nation that operates in a 
world of rules-based behavior. However, we must ``handicap'' the 
potential outcomes. This particular one may get a two or three in five. 
It is also possible that we will see a China in chaos, with the 
legitimacy of the ruling party collapsed and the floating labor 
population tearing the country apart. And it is possible that the 
emerged Chinese state will have a powerful, coercive military that 
threatens not only its neighbors, but the United States as well. Thus, 
while the United States embraces policies that encourage the first 
outcome, it must maintain its military edge and the ability to defend 
American interests in the event of the last outcome.

    Senator Brownback. Thank you, Dr. Wortzel.
    Dr. Lampton, you started all of this with The Nixon Center 
and Richard Nixon's trips.
    Dr. Lampton. I cannot claim all the credit or the blame, 
either way.
    Senator Brownback. Well, it was a bold stroke, and here we 
are, what, nearly 25 years later--well, no, we are over 35 
years later--and moving forward.
    Dr. Lampton. Well, I think President Nixon would not have 
envisioned the world that we are in, in many respects, and 
certainly not with China, both in some of the problems we have 
and some of the successes.

   STATEMENT OF DR. DAVID M. LAMPTON, GEORGE AND SADIE HYMAN 
 PROFESSOR OF CHINA STUDIES, JOHNS HOPKINS SCHOOL OF ADVANCED 
  INTERNATIONAL STUDIES AND DIRECTOR OF CHINESE STUDIES, THE 
                  NIXON CENTER, WASHINGTON, DC

    Dr. Lampton. Let me say it is a great honor to be with you 
this afternoon and this subcommittee. I think we are all aware 
of and thinking about our forces in the Middle East and Central 
Asia. But I do think this problem that we are talking about 
today is going to be one of the most enduring, long-range 
problems we face. As a great country, we have to be able to 
walk and chew gum at the same time, and I am very pleased that 
your subcommittee and you, Mr. chairman, are interested in this 
topic at this time.
    I have a bottom line in my testimony and in my view, and 
that is that America's strategy with China ought to be to 
reinforce the generally positive trends associated with China's 
rise, create as benign an external environment as possible in 
East Asia, but, as Mr. Wortzel just said, maintain the capacity 
to respond if things go awry.
    I think there are five things that undergird that general 
proposition, that general bottom line. The first one is that it 
is most prudent to assume that China will enjoy--I think it 
will be variable, but, nonetheless, generally rapid economic 
growth for the next decade or two. China's economic influence 
and military power, therefore, will likely become increasingly 
formidable. Though it is possible, it is unwise, in my view, to 
bet that China will have a sudden regime change, that there 
will be widespread instability, or that its economic growth 
will stall for a prolonged period of time.
    My second assumption is that we cannot be certain how 
Beijing will use its growing power. And I would agree, anybody 
who has certainty about how China will use its future power in 
any long timeframe is probably not as wise as they ought to be. 
I think it is unknowable what the internal conditions that will 
shape future Chinese policy will be. It is going to be 
impossible for us to know the environment that China's leaders 
are going to be responding to. Indeed, it is going to be 
impossible to know who those leaders are going to be in the 
future.
    Our strategy, therefore, ought to be to try to reduce some 
of these uncertainties, and there are a couple of things that 
we can do. One is to try to connect to new Chinese leaders. 
Literally hundreds of people that the United States doesn't 
understand, or have much connection to are rising to the fore. 
And we ought to have a national strategy of trying to connect 
to this new generation and do what we can to understand it. In 
the aggregate, there is no reason to believe we cannot work 
with the generation of leaders that is moving up in China, but 
that is a proposition to be tested, and we ought to do so 
seriously.
    My third assumption is that the foundation for U.S.-China 
relations now is sounder than it has been since 1989, 
notwithstanding the frustrations and, I would say, mutual 
strategic apprehension that both countries have of each other. 
Beijing has been reasonably cooperative in the war on terror. I 
think Larry had a somewhat more modest estimate of how useful 
China has been, and I am not trying to exaggerate it, but I 
think everybody in the administration would say we have been 
better off with China's degree of cooperation than certainly 
some of those others that have been traditionally our allies.
    Turning to economics, the foundation of economic ties has 
been strengthened. I met with the Minister of Finance of China 
not too long ago, and I have done some research with our own 
Treasury Department. Beijing now holds 8.4 percent of all U.S. 
Treasury notes held by foreigners, second only to Japan. And in 
addition, holds about $50 billion in U.S. State, local, and 
corporate debt instruments. If you look at the total debt 
instruments of the United States that China holds as of the end 
of last year, it is about $150 billion. If you look in Mr. 
Wortzel's testimony you will find that the United States has 
invested considerably less in China than they have invested 
here. So I just think that's interesting, just a little factoid 
that shows you how deep this relationship is when you really 
begin to get into it.
    Having said that the relationship is stronger than it has 
been since 1989, I have to say a couple of things. One is that 
China has very grave apprehensions about the national security 
strategy of the United States issued in September of last year. 
It is true, as I think Secretary Schriver said earlier, China 
is proud--and I think ``proud'' is a well-chosen word--to be 
considered a great power. That is the one part they like of the 
document.
    But Senator Corzine asked the very key question: Are the 
Chinese not also apprehensive about our national security 
strategy? And I believe the answer is yes, they are. It has to 
do with preemption, as he suggested. It has to do with the U.S. 
commitment to stay on top of the power heap; period; forever. 
And it has to do with a number of other aspects of this; in 
particular, the commitment to political system change. I am not 
saying all the Chinese criticisms are correct, but I do want to 
say they are apprehensive about what they perceive to be our 
national security strategy. So while the relationship is sound, 
or sounder, it is in relative, not absolute, terms.
    My fourth assumption is that there is a reasonable chance, 
and I would say actually a pretty good chance, that Chinese 
nationalism will be directed mainly, for the next two decades, 
toward internal modernization rather than, let us say, external 
expansion, with the important exception of Taiwan, which the 
Chinese would consider internal affairs and we would consider 
in some other way perhaps. But in any case, I am not too 
worried about Chinese expansion, at least in a territorial 
sense. The economic leverage of China is increasing enormously, 
and we could be perhaps concerned about that.
    Let me just tick off some policy implications. I do not 
want to leave the impression that I think it is only the United 
States that has things to do in this relationship in order to 
make it stronger. China has a lot of things to do, too. But let 
me tick off several things we can do and a couple of things 
that China could do.
    One of the things I am most worried about is the 
development of an arms race in East Asia. The administration, 
frankly, could do several things to reduce either the intensity 
of it or the occurrence of it. First, the administration should 
be exploring how the United States can build and deploy an ABM 
system that least threatens China's minimal deterrent and 
elicits the most restrained response from Beijing possible. 
Washington needs to talk to the Chinese about strategic nuclear 
and missile defenses, which the administration seems loath to 
do.
    My second suggestion is that the administration should be 
developing a strategy for dealing with North Korea that China, 
Japan, and South Korea can agree with and support. We have not 
done so. This almost inevitably means, in my view, that 
Washington will end up talking directly to Pyongyang, whether 
we like it or not or trust them or not--of course, we do not 
trust them. But I think it is not just China that is opposed to 
the U.S. current approach; it is, indeed, our other friends in 
the region, most notably, the Republic of Korea. They all, as 
far as I can see, want us to talk to North Korea, however 
distasteful we may find that.
    The third thing is, the administration should be 
encouraging a trilateral security dialog among China, Japan, 
and the United States so as to stabilize that three-way 
relationship. I agree with one of the implications of Larry's 
testimony--Sino-Japanese ties are one of the more volatile 
relationships for the long-term. And if that relationship goes 
haywire, we are all in trouble. To manage problems in East 
Asia, you need China, the United States, and Japan, if not to 
be singing the same notes, be at least on the same page of 
music. And frankly, we are not, and we ought to be trying to 
get us on somewhat the same page.
    And fourthly, the administration should be exploring with 
Beijing what former President Jiang Zemin meant by his 
suggestion in October and November of last year that China 
might remove some of its missiles from their threatening 
positions near Taiwan were the United States to show parallel 
restraint in its military links with Taipei. So far, the 
administration's silence on this issue has been deafening.
    So, we should look at some of the problems that are fueling 
an arms race and address them.
    Now, in the spirit of acknowledging that China needs to do 
some things here, I'd just tick off a couple that I would 
suggest. First of all, if you just look at not only the public 
relations of it, but the humanity of it, China ought to be 
supporting a way in which Taiwan can participate in the World 
Health Organization. And we see the latest example of the 
problem with this flu, this upper respiratory stress syndrome. 
The fact of the matter is, the WHO isn't dealing with Taiwan 
because Beijing objects, and that's the fact of the matter. 
There ought to be a way to get the 22 million people of Taiwan 
involved--and they're not participating in a life-and-death 
organization. I think they should.
    Also, China has made, as Mr. Wortzel said and was mentioned 
earlier, I guess by Secretary Schriver, progress on 
proliferation. I think you have to admit that. But, on the 
other hand, we need a lot more progress, and the Chinese have 
to tighten up that export control and their proliferation 
policy beyond what it is. So there's a lot we can do.
    The relationship's better than it's been in a long time, 
but there's plenty of room for improvement.
    [The prepared statement of Dr. Lampton follows:]

  Prepared Statement of David M. Lampton \1\, George and Sadie Hyman 
  Professor of China Studies at the Johns Hopkins School of Advanced 
  International Studies and Director of Chinese Studies at The Nixon 
                                 Center
---------------------------------------------------------------------------

    \1\ David M. Lampton is George and Sadie Hyman professor of China 
Studies at the Johns Hopkins School of Advanced International Studies 
and director of Chinese Studies at The Nixon Center. He is the author 
of ``Same Bed, Different Dreams: Managing U.S.-China Relations 1989-
2000'' and the editor of ``The Making of Chinese Foreign and Security 
Policy in the Era of Reform.'' He is past president of the National 
Committee on U.S.-China Relations in New York City (1988-1997).
---------------------------------------------------------------------------
        THINKING ABOUT THE SECURITY IMPLICATIONS OF CHINA'S RISE

    Mr. Chairman and Members of this distinguished subcommittee, I am 
pleased to have this opportunity to be with you.
    I have been asked to address the issue of what China's rise means 
for East Asia and the interests of the United States, particularly in 
the security realm. I want to commend this subcommittee for taking time 
to address this centrally important long-term issue even as we all are 
preoccupied with the welfare of our forces in the Middle East and 
Central Asia. It says a lot that an administration that came into 
office skeptical about what China's rise may mean for America now is 
cooperating meaningfully with China in the war against terror and that 
President Bush as recently as March 18th (Beijing time) called China's 
new president, Hu Jintao, to express the desire for closer U.S.-China 
relations.\2\ In the last thirteen months President Bush met four times 
with Jiang Zemin (who just stepped down from the presidency, but may 
well remain the ``core'' of the leadership \3\) and once (last spring) 
with just-named President Hu Jintao.
---------------------------------------------------------------------------
    \2\ ``Hu Jintao yu Bushi tung dianhua: Zhongguo xiwang heping buyao 
zhanzheng''[Hu Jintao and Bush Talk by Phone: China Wants Peace, Not 
War], Renmin Wang, http://www.peopledaily.com.cn/Gbshizheng/16/2003031 
9/946767.html (accessed, March 17, 2003).
    \3\ See http://news.xinhuanet.com/newscenter/2003-03/18/content 
786235.htm
---------------------------------------------------------------------------

                          A BROAD PERSPECTIVE

    Here is my bottom line--America's strategy should be to reinforce 
the generally positive trends associated with China's rise, create as 
benign an external environment as possible in East Asia, and maintain 
the capacity to respond if developments go awry.
    Five propositions capture the thinking that leads me to this 
conclusion:

   In assessing the future impact of China's rise, it is most 
        prudent to assume that China will enjoy variable, though 
        generally rapid economic growth for the next ten to twenty 
        years. Consequently, China's economic influence and military 
        power likely will become increasingly formidable. Though 
        possible, it is unwise to bet that China will have sudden 
        regime change, widespread instability, and that its economic 
        growth will stall for a prolonged period. Nonetheless, China's 
        modernization process will be tumultuous and full of 
        uncertainties, one of which concerns the incomplete transition 
        of power in China that has just occurred, another rising 
        inequality, and a third the unhealthy financial system. Were 
        China to fall into disorder and revert to its pre-reform-era 
        posture of a dissatisfied power, this would be very inimical to 
        U.S. interests. The likely scenario upon which we should base 
        policy is that of continued growth, protracted political 
        liberalization, and non-trivial social disturbances.

   We cannot be certain how Beijing will use its growing power. 
        Unknowable internal considerations will shape future policy and 
        we cannot now discern the external environment to which China's 
        leaders will be responding. To shape and reduce these 
        uncertainties, however, the United States needs to do two 
        things: connect to leaders of Chinese society at all levels and 
        work with Beijing and its neighbors to construct as benign an 
        external environment as possible. A principal uncertainty for 
        the future concerns ties between China and Japan. With respect 
        to leadership, China's November 16th Party Congress and the 
        just-completed 10th National People's Congress have brought to 
        power hundreds of new leaders at all system levels. Moreover, 
        society outside the state is growing. In the aggregate, there 
        is no reason that we ought not be able to work with China's 
        leaders and emerging middle class and there should be a 
        concerted national effort to do so.

   The foundation for U.S.-China relations now is sounder than 
        it has been since 1989, notwithstanding current frustrations in 
        the UN Security Council and elsewhere and the mutual strategic 
        apprehension each still has about the other. Beijing has been 
        reasonably cooperative (and certainly not obstructionist) in 
        the war on terror. Witness, for example, that while Beijing is 
        not in favor of a war in Iraq at this time, there was never a 
        serious danger of a Chinese veto of a second UN resolution and 
        that, indeed, Beijing voted for UN Resolution 1441 on November 
        8, 2002. Although we have ongoing and legitimate worries about 
        Beijing's proliferation behavior, China appears to be 
        strengthening its export control regime (e.g., the August 2002 
        issuance of missile, chemical, and biological technology and 
        agent control regulations and lists) and seems to see 
        increasingly clearly the dangers that proliferation represents 
        to its own interests (e.g. South Asia and North Korea). 
        Nonetheless, there is room for further improvement in China's 
        anti-proliferation work. The foundation for bilateral ties also 
        has been strengthened through increasing U.S.-China economic 
        linkages. For example, Beijing now holds 8.4% of U.S. Treasury 
        notes (held by foreigners), second only to Japan, and holds 
        about $50 billion in U.S. state, local, and corporate debt 
        instruments. \4\ In short, in this globalized world, a solid 
        foundation for ties requires both positive security and 
        economic links, and these are now more robust than at any time 
        in the last fourteen years. Having said this, China has 
        substantial apprehensions about the September 2002 National 
        Security Strategy of the United States of America.
---------------------------------------------------------------------------
    \4\ David M. Lampton, ``U.S.-China Relations--`Normalized' At 
Last?'', (March 2003), forthcoming, now in manuscript. Data from: 
``Foreign Exchange Reserves,'' Financial Times Information, Global News 
Wire, The Korean Herald, February 19, 2003, http://web.lexis-nexis.com/
universe/document? (accessed February 21, 2003). Also, David M. 
Lampton, ``Notes of Meeting with Senior Chinese Official,'' September 
8, 2002, Washington, D.C.

   There is a reasonable chance that Chinese nationalism will 
        be directed toward internal modernization for at least a decade 
        or two, and not onto the road of militarization. Chinese 
        leaders believe they cannot remain in power if they fail to 
        meet popular material demands. A widely shared analysis in 
        China ascribes the collapse of the Soviet Union to its 
        excessive military expenditures and the Kremlin's inadequate 
        attention to economic needs. In this light, the recent single 
        digit (9.6%) military budget increase announced at the just-
        concluded NPC may be suggestive (the previous 13 years saw 
        double digit increases). I hasten to caution that other 
        military-related expenditures may have been larded elsewhere in 
        the national budget.\5\  More broadly, because about one-third 
        of its exports go to the United States and employment in China 
        is significantly affected by economic ties to America, China's 
        leaders see a linkage between the capacity to effectively 
        address their own internal problems and continued productive 
        relations with America--this doesn't assure harmony, but it 
        increases the odds of it.
---------------------------------------------------------------------------
    \5\ Xing Zhigang, ``Military budget rise lowest in 14 years,'' 
China Daily, Friday, March 7, 2003, p. 3; as to possibility that 
defense items may be elsewhere in the budget, this information comes 
from a recent interview with a Chinese citizen by David M. Lampton.

   The Chinese realize that power has different faces--
        military, economic, and normative (ideological) power. Right 
        now, China is finding that in the era of globalization, 
        economic power (and potential economic power) is the form of 
        power it has in greatest abundance and which it can use most 
        effectively. As long as economic influence continues to be 
        effective for Beijing, as it now seems to be in dealing with 
        Taiwan, for example, China is unlikely to resort to military 
        intimidation as its chief foreign policy instrument. Further, 
        there is no doubt that Beijing recognizes the military 
        superiority of the United States and consequently is cautious. 
        Indeed, this is one reason why China is placing increasing 
        emphasis on using multilateral organizations (such as the UN 
        Security Council) as a means to restrain the unilateral 
---------------------------------------------------------------------------
        exercise of American power.

    These views add up to a perspective on China's rise and its 
implications that is much different from that of the University of 
Chicago's John Mearsheimer. In his book The Tragedy of Great Power 
Politics, Mearsheimer asserts that it doesn't matter whether China 
becomes democratic or not; the mere fact that it is growing rapidly 
puts it on a collision course with America (p.4). This is so because 
the international system is a jungle; in the jungle force is most 
useful; and all states will convert economic power into growing 
coercive power to achieve dominance in that jungle. In contrast, I 
believe that China now defines its security principally in terms of 
internal economic welfare and social stability, that it is not striving 
for external dominance (with the important exception of Taiwan), and 
that if America helps create a moderately benign regional security 
environment there is no reason China and America cannot cooperate to 
their mutual advantage for a considerable period. In short, China is 
rising the ``right way'', not the wrong way, from the perspective of 
American interests, with the principal uncertainty being Taiwan. Those 
who see an inevitable conflict on the horizon propose adopting measures 
that assure the outcome they profess to wish to avoid.
    The following issues merit specific consideration in light of 
China's increasing power and influence:
    First, China is modernizing its military in terms of projection 
capability, a secure nuclear deterrent, and internal management. For 
the last eighteen years China has been trying to transform its military 
into a more professional force able to fight the next regional conflict 
offshore, not on its own territory as Mao Zedong contemplated. This 
reflects the desire to protect China's increasingly valuable coastal 
assets and to deter Taiwan from making possible independence moves. The 
PLA has made steady progress, though it remains far behind U.S. 
technological and organizational levels. As its national economy grows 
Beijing will have more wherewithal to continue making progress.
    Second, as the United States develops its missile defenses, and 
possibly transfers these capabilities to regional allies, China will 
increase its missile and warhead numbers and diversify its delivery 
modes in order to assure a second strike capability. Indeed, China has 
been modernizing its strategic forces gradually because its deterrent 
capability already is problematic. If one combines this ``vertical'' 
proliferation in China with ``horizontal'' proliferation in North 
Korea, the Republic of Korea, Japan, and Taiwan will come under 
increasing pressure to develop offensive forces themselves, perhaps 
nuclear capabilities. In short, there is no way that China can 
modernize its military without creating some anxiety among neighbors, 
thereby generating pressures for regional arms expansion. Conversely, 
proliferation around China may push Beijing along an upward trajectory 
as well. What Japan does will be particularly important in this 
respect.

                  SOME SPECIFIC POLICY RECOMMENDATIONS

    In an effort to minimize the action-reaction arms race cycle, the 
administration should do several things: A) It should be exploring how 
the United States can build and deploy an ABM system that least 
threatens China's minimal deterrent and elicits the most restrained 
response from Beijing in terms of increasing warhead numbers. 
Washington needs to talk to the Chinese about strategic nuclear weapons 
and missile defenses, which the Administration seems loath to do, 
particularly the Department of Defense. B) The Administration should be 
developing a strategy for dealing with North Korea that China, Japan, 
and South Korea can agree upon--we have not yet done so. This almost 
inevitably means Washington will have to speak directly with Pyongyang. 
The sooner we build this consensus and proceed with its logic, the 
better off we all will be. C) The Administration should be encouraging 
trilateral security dialogue among China, Japan, and the United States 
to stabilize that three-way relationship to the greatest extent 
possible. And D), the Administration should be exploring with Beijing 
what former President Jiang Zemin meant by his suggestion in October 
and November of 2002 that China might remove some of its missiles from 
threatening positions near Taiwan were the United States to show 
parallel restraint in its military links with Taipei. Without endorsing 
this rather vague proposal, it does provide an opening for dialogue 
that might help retard militarization in the Taiwan Strait, a 
militarization that Taiwan can ill-afford. So far, the Administration's 
response has been deafening silence.

    Senator Brownback. Dr. Lampton, is China moving toward a 
democracy at the national level, or not?
    Dr. Lampton. I would put it a little differently. I would 
say China is, as a society, developing the preconditions that 
make a democracy, or, let us say, more humane, lawful, and 
pluralistic government possible. But I think, frankly, we're 
talking about a process of decades. There isn't going to be a 
solid basis for democracy until China really has a middle class 
that demands rule of law. It's going to take a tremendous 
amount of time to build the institutions to regulate a market 
economy.
    So the way I would put it is, they're headed in the right 
direction. The slope is up, toward what we would concede to be 
a more desirable form of government. But I think it's going to 
take a long time. I'd just observe that, of course, we would 
have said the same thing about the Soviet Union in 1985, 
perhaps, and by 1991, we were in a radically different 
situation. So analysts can be wrong. I can be wrong, for sure. 
And almost everything of significance that has happened in 
China in the last 30 years has been unpredicted by the experts. 
So I guess I will say I hope this becomes one more example of 
experts being wrong.
    But they're moving in the right direction. I think the U.S. 
business community and our engagement with China, and 
invitation to students and scholars to study here, has been an 
enormously successful foreign policy that we've conducted.
    I know many people think our policy with China has been 
unsuccessful. I respectfully disagree. I think it has been one 
of the most successful policies of the last 60 years that we 
have had with a major country that you can enumerate.
    Senator Brownback. Is China doing all it can to stop the 
nuclear proliferation by North Korea?
    Dr. Lampton. I think largely so. Of course, I am not privy 
to classified information. And also one could question their 
behavior in the past--I am not absolutely sure that they have 
not done things that were helpful to North Korea in the past. I 
am reasonably sure that they are not doing anything now to 
assist in the North Korean nuclear effort.
    And indeed, I just went, in November, with former Secretary 
Perry and Mr. Scowcroft and others, to China and talked to the 
top four leaders as they relate to this issue. Without 
presuming to speak for Secretary Perry or Mr. Scowcroft, I, 
personally, concluded from those discussions that the Chinese 
are increasingly alarmed at the phenomenon of proliferation. I 
mean, now they have Pakistan--which they unfortunately, from 
our point of view, helped create as a nuclear problem. India, a 
very volatile situation is to their south. They are worried 
about Taiwan eventually, and the United States has played a 
role in damping down Taiwan's efforts a couple of times in the 
past. They are very worried about North Korea. And, as one of 
my friends has said, ``You know, with friends like the North 
Koreans, who needs enemies?'' So they're very worried about 
that. They, of course, still have Russia, with thousands of 
nuclear warheads. And so I think they're worried about the 
environment that they're in, and in particular the stability of 
the North Koreans and the decisionmaking structure that they 
have. So I take the Chinese at their word that they do not want 
the Korean Peninsula with nuclear weapons.
    The problem is--and I think Mr. Wortzel captured the 
Chinese priority. For the United States, the first, second, and 
third priority is no nuclear weapons on the Korean Peninsula. 
Those are our top priorities. I think the first priority for 
the Chinese is no instability in North Korea. And then nuclear 
weapons are important, but I think it's not the first priority. 
And so I think the Chinese are ultimately afraid that the means 
the United States would use to stop the North Koreans from 
getting nuclear weapons will jeopardize their first security 
priority, which is stability in North Korea.
    The Chinese are concerned that we would use means that 
would jeopardize their, meaning the Chinese, first security 
priority, which is no instability.
    Dr. Wortzel. Mr. Chairman.
    Senator Brownback. Dr. Wortzel.
    Dr. Wortzel. If I could. The history of strategic thinking 
about nuclear weapons in China is that proliferation is a good 
thing, because it breaks what they term the superpower monopoly 
on those weapons. I think that they have--the history of them 
recently proliferating weapons of mass destruction and missiles 
is that they have stiff-armed us at every turn and lied and 
cheated and proliferated. And as recently as today, or was it 
yesterday, Bill Gertz, in the Washington Times, has another 
example of that, of perhaps more materials going into North 
Korea that would lead to proliferation.
    Senator Brownback. What countries would those be, Dr. 
Wortzel? I mean, Pakistan has been mentioned.
    Dr. Wortzel. Pakistan has been mentioned, certainly Iran, 
Syria, perhaps back earlier to Iraq, we know of North Korea. So 
the real dilemma for China now is the second and third order 
effects of what might happen in Japan, and I think that's where 
our diplomacy has to focus.
    They are happy, I think, that they're at the center of 
diplomatic crossroads. I think they're quite happy that the 
United States is pretty well extended militarily in a lot of 
other parts of the world and can't focus on Taiwan or on them 
or even on North Korea.
    But I think we need robust ballistic missile defense 
deployed in East Asia. I think we need to work with the 
Japanese to get ballistic missile defenses out there, and I 
think we need to press the Chinese to remind them that the 
worst consequences of their behavior would be a remilitarized 
Japan.
    Senator Brownback. Where all would you place ballistic 
missile defenses throughout East Asia? What countries do we 
need to do that?
    Dr. Wortzel. I think that we have to work very closely with 
the Japanese. I think we need sea-based defenses, and I think 
we can get ground-based defenses here and there.
    South Korea is less interested in ballistic missile 
defenses, quite frankly, because they could be obliterated by 
artillery. So they're not terribly interested.
    Taiwan is a place that has great need for shorter-range 
ballistic missile defenses, primarily sea-base, but ground-
based would do them very well.
    Our relationship with Japan and the interpretation of the 
Japanese constitution makes it extremely sensitive to begin to 
talk about architecture. In 1998, Strom Thurmond, Defense 
Authorization Act, asked for the study of a theater 
architecture involving Japan, Korea, and Taiwan. I think that's 
a great goal. But I think that if we really want to move 
forward with Japan and we want to work with the Japanese on 
moving into development and deployment, any system with Taiwan 
that eventually the Taiwan legislature may fund because they've 
been very slow to do that, not just for economic problems, but 
also because they don't want to anger them, some elements in 
Taiwan, don't want to anger the mainland. But I think it needs 
to be an architecture in and of itself, perhaps an architecture 
that's readily linked to the United States. But talking about a 
theater architecture involving the United States, Japan, and 
Taiwan will drive the Japanese public, in my opinion, away from 
a decision that Japan needs to make, and that is to move 
forward on a ballistic missile defense.
    Senator Brownback. What's the likelihood of Japan becoming 
a nuclear power if North Korea continues its track and develops 
nuclear weapons?
    Dr. Wortzel. Well, as you know, at the Heritage Foundation, 
we've had a very close relationship with some of the 
conservative faction in the Japanese Diet. It's a multiparty 
faction. It's about 25 Diet members. For 8 years, they've been 
coming to Heritage to talk. I go to Japan twice a year and meet 
with them. Five former Defense Ministers, or the JDA heads, and 
the current JDA head, are part of the group.
    I think it's fair to say that there are some people that 
very, very seriously believe that if Japan faces that sort of 
threat, it needs to develop the capability to respond. And it 
is only their belief in the American nuclear umbrella that 
inhibits that.
    Dr. Lampton. I just might say a couple of things, one on 
Taiwan--their missile defense. I think it would be very 
important not to, at least initially, transfer ABM technology 
beyond the Patriots, which we already are, to Taiwan. First of 
all, I just made a proposal that we at least explore with the 
Chinese their offer to reduce some of the missiles near the 
Taiwan Strait and at least plumb other strategies to reduce 
tension there. We might end up failing at that and then come 
back the ABM option. But I think there are some things to do 
before we get there.
    Also, even if we decided that missile defense was needed in 
that area, I would hope we could go to ship-borne ABM that 
would remain under U.S. control for a number of reasons, one of 
which includes technology leakage.
    So let's explore the diplomatic possibilities in finding a 
way to de-escalate tension in the Taiwan Strait first. If that 
fails, think about alternative strategies. But I think giving 
the technology directly to Taiwan would be way down my priority 
list for two reasons. First, it would jeopardize Taiwan's 
security. You would not be able to predict Beijing's reaction 
and then we'd have to cope with that. And, second, it's going 
to be very expensive. And Taiwan needs to use its investment to 
increase its economic competitiveness. The biggest threat to 
the island is that it's not doing what it needs to do for its 
own economic development. And there are many reasons for that, 
and we could go into it.
    But the long and the short of it is that the strategy of 
encouraging Taiwan to spend enormous amounts on technology 
trying to achieve security when the biggest threat to its 
security is its own economy is not wise. Not what I would 
perceive to be Taiwan's interests, our interests, or anybody 
else's.
    Senator Brownback. Dr. Lampton, too, I hope your institute, 
you'd look some to it, the Chinese treatment of North Korean 
refugees, which I think is just an absolutely deplorable 
violation. I mean, it's deplorable human rights, but it's a 
huge violation of their agreement under the U.N.--their 
agreement with the U.N. High Commission on Refugees. I mean, 
and this is--I suppose you could say, if it were a couple of 
hundred people, it's not a huge issue to arise, although I 
think we should look at every person uniquely. But you're now 
in--a third of the population of North Korea is being fed by 
international food donations, and literally thousands have 
walked into China, and a number are being caught and 
repatriated--into a horrible situation. I would hope that would 
also cross your radar screen on the relationship.
    Dr. Lampton. Well, Senator, I certainly agree that forcing 
people back across the border so that they can meet an 
uncertain but almost certainly violent consequence is not 
anything I would endorse and I think we all feel enormously 
badly about that. I think we ought to be doing what we can as a 
government to find an orderly process by which people can get 
into China, get out of China, and go somewhere. But I think the 
problem doesn't just stop at China's doorstep.
    You have to ask who will take people in that volume today? 
And you can start, I think, asking the question with respect to 
the Republic of Korea. As I would understand the Republic of 
Korea's policy, it is to take people if they can get there, but 
they're not encouraging the Chinese to have large numbers of 
people go to South Korea. And of course we would like to find 
other countries that would be willing to take these 
individuals, as well. So I think the Chinese----
    Senator Brownback. I think we did that. In Indochina in the 
1970s, where there was a couple of million people that moved 
out and various places around the world when they faced such 
horrific conditions.
    Dr. Lampton. Yes.
    Senator Brownback. I would hope we could do something 
similarly here. And I think it would be viable and possible, 
but China is the door. They have to be the door to this.
    Dr. Lampton. Right.
    Senator Brownback. And so far, they've indicated no 
willingness whatsoever to do anything but send the North Korean 
refugees back.
    Dr. Lampton. I think that's right, and I'm the last one to 
carry the water for the Chinese on anything, and including 
this. All I would say is, I think the Chinese occasionally--you 
hear various numbers, but there may be up to 200,000 or more 
people from North Korea in China in the border areas. And my 
sense is that Beijing often turns a blind eye to those people. 
It's when they start moving into the cities----
    Senator Brownback. You used to. But after some of the high-
level embassies were hit they've gone--and I went to that area 
in December, and after the high-level incidents took place, the 
Chinese went in and really started sweeping, even through the 
northern areas, to capture North Korean refugees and send them 
back.
    Dr. Lampton. That's true.
    Senator Brownback. That's really bad----
    Dr. Lampton. I had a graduate student go there who is of 
Korean nationality, and her 40-some-page report is an eye-
opener. Let me put it that way.
    Senator Brownback. It has opened my eyes.
    Thank you both very much. This has been a very interesting 
panel. It's been a very interesting overall hearing, but you 
provide a lot of food for thought. And you've been at this work 
for a long period of time, and I appreciate your willingness 
both to share your expertise.
    Dr. Lampton. Thank you.
    Senator Brownback. The record will remain open for the 
requisite number of days. The hearing is adjourned.
    [Whereupon, at 4:50 p.m., the subcommittee adjourned, to 
reconvene subject to the call of the Chair.]

                              ----------                              

       Responses to Additional Questions Submitted for the Record

                                ------                                

       Responses of Charles Freeman, Deputy Assistant U.S. Trade 
  Representative, to Additional Questions for the Record Submitted by 
                          Senator George Allen

    Question. Procurement Issue: The Wall Street Journal recently 
reported (March 7, 2003) that an interagency task force in charge of 
the central government's information-technology planning efforts 
proposed procurement guidelines that may limit market access and open 
competition for procurement of software products by the Chinese 
government.
    This is a cause for great concern since it would violate the spirit 
of free trade commitments within the WTO and send the wrong message 
that China is not open to free trade and utilizing the best software 
and security technology available.
    Are you aware of these guidelines? If so, what is your assessment 
of its applicability to software makers in the U.S.? What do you think 
is the best way for China to achieve its goals of developing a local 
high tech industry while staying true to its free trade commitments 
within the WTO?

    Answer. We have encouraged China to practice fair and open 
procurement policies and to allow market conditions to be the primary 
determinant in government procurement. However, China is not a 
signatory to the WTO Agreement on Government Procurement, and has no 
trade commitments to ensure equal access to government contracts for 
foreign suppliers.
    China is clearly a growing market for American software. Many 
American software companies have made sales to the Chinese government 
and are expanding operations in China to better market their products 
to Chinese purchasers. While the Chinese government has not signed the 
WTO Government Procurement Agreement, we do expect China to honor all 
of its WTO commitments, including those related to national treatment 
for products regardless of national origin.

    Question. Software Piracy Problem in China: In 2001, the business 
software piracy rate in China was 92%, the second highest level in the 
world. Losses due to software piracy in China in 2001 amounted to a 
staggering $1.66 billion. The biggest problem facing the software 
industry is enterprise end user piracy, when businesses and government 
institutions use unauthorized copies of software.
    The high piracy rate not only curtails China's ability to attract 
foreign investment but also hinder the development of its own high tech 
industry.
    As a WTO member, what can China do to decrease the piracy rate? 
What type of legislative reforms and enforcement resources would be 
required and what is your sense of China's commitment to IPR issues.

    Answer. China's proection of intellectual property rights continues 
to be one of our greatest concerns. While China has made great strides 
over the past decade and improved its legal regime significantly prior 
to its accession to the WTO, the level of piracy remains disturbingly 
high. We are actively engaged with the Chinese government on this 
issue, and are pressing them to enforce the laws on their books.
    The Chinese government appears to understand that piracy is not 
simply a matter of concern to foreign companies, but also poses a 
dramatic threat to China's domestic economic development. While the 
government still has much to do to provide adequate protection for IPR, 
there have already been many positive changes in China's IPR protection 
regime, and we believe the Chinese government is committed to fixing 
the problem areas that remain.
    China's WTO commitments include a promise to attain a ``deterrent'' 
level of enforcement against IPR piracy. We expect China to fully honor 
this commitment and are working with the Chinese government to ensure 
that this is the case.

                                 ______
                                 

 Responses of Randall G. Schriver, Deputy Assistant Secretary of State 
  for East Asian and Pacific Affairs, to Additional Questions for the 
            Record Submitted by Senator Joseph R. Biden, Jr.

    Question 1. Did Secretary Powell discuss the situation of North 
Korean refugees in China during his recent trip to Beijing, and will 
this issue be on the agenda for Vice President Cheney's planned trip to 
China next month? What specific recommendations is State making to the 
Chinese to address the problem from the perspective of humanitarian 
concerns and China's international refugee protection obligations?

    Answer. Substantial number of North Koreans, who have entered the 
PRC seeking food or work or fleeing persecution in the DPRK, live in 
Northeast China. The PRC considers all North Koreans in China to be 
economic migrants, while we believe there are bona fide refugees among 
them. Their situation in China is of great concern to this 
Administration, and we are troubled by reports that China continues to 
forcibly repatriate some of these people back to the DPRK where they 
may face severe mistreatment upon return. As a signatory to the 1951 
Convention on Refugees and the 1967 Protocol Relating to the Status of 
Refugees, China has an obligation to allow the UNHCR access to this 
population in order to assess their status. We have repeatedly pressed 
China to live up to this obligation, to treat the North Korean 
population in China in a humanitarian spirit, to stop all deportations 
back to the DPRK, and to allow North Koreans who wish to leave for the 
ROK to do so.
    The U.S. Government has also expanded its support for humanitarian 
assistance programs run through the UNDP which target the North Korean 
population in China, providing North Koreans with food, medicine, 
shelter, and other humanitarian services.

    Question 2. The UN Commission on Human Rights opened this week in 
Geneva, and today the EU foreign ministers left the door open to 
supporting a resolution on China, though the EU won't take the lead. 
Why has the administration hesitated to sponsor a resolution this year 
on China's human rights record? Does it intend to do so, and if so, 
when?

    Answer. After careful consideration, the Administration decided not 
to sponsor a resolution on China's human rights practices at the 2003 
session of the Commission on Human Rights (CHR). The decision on a 
resolution followed a year of limited, but unprecedented, progress on 
human rights issues in 2002 and was based on what we believed would 
best advance human rights in China with the new government in Beijing. 
This progress included China's decision to allow special 
representatives of the Dalai Lama to visit Beijing and Lhasa and the 
release of a significant number of political prisoners, including 
democracy activist Xu Wenli and Tibetans Jigme Sangpo and Ngawang 
Sangdrol.
    Unfortunately, the progress on human rights that we saw in 2002 has 
not been sustained in 2003. In recent months, we have seen significant 
backsliding, including the arrests of democracy activists and those 
posting information on the Internet, continued denial of due process 
for those accused of political crimes, as well as the execution of a 
Tibetan without due process. We are also concerned by China's failure 
to take steps to live up to the commitments it made during the December 
2002 human rights dialogue, including cooperation with UN human rights 
mechanisms and the release of political prisoners. We have conveyed our 
concern and disappointment over these negative developments at the 
highest levels in Beijing and Washington. In the months ahead, we will 
continue to press China's government to improve its human rights record 
and to implement the commitments it undertook as part of our human 
rights dialogue.
    In consultation with like-minded governments, we will decide 
whether to sponsor a resolution on China at the 2004 session of the CHR 
based on China's human rights progress over the course of the year. We 
have made it clear to the Chinese government that progress will be 
necessary to avert a resolution.

                                 ______
                                 

 Responses of Randall G. Schriver, Deputy Assistant Secretary of State 
  for East Asian and Pacific Affairs, to Additional Questions for the 
            Record Submitted by Senator Russell D. Feingold

    Question. The title of this afternoon's hearing is ``emerging 
China,'' which seems to assume that China's recent impressive economic 
growth performance will continue. Yet China has a number of emerging 
problems that it could have a difficult time emerging from. These 
include an insolvent banking system, widespread official corruption, 
labor unrest, urban-rural and regional inequality, an HIV/AIDS 
epidemic, a worsening water shortage and severe environmental 
degradation. How likely do you think any one or combination of these 
factors is to disrupt China's economic future?

    Answer. The complexity of development challenges facing China is 
significant. China is not unique in this regard, as many nations in the 
developing world face similar challenges. Thus far, China has had 
comparative success, despite these difficulties, in promoting growth 
and raising income levels. It is difficult to quantify the extent to 
which any one, or a combination of the problems cited in the question 
will curtail the continued growth of China's economy, although we 
recognize it as a serious concern. It is clear that the Chinese 
government's overriding goal is to promote growth and that it 
increasingly recognizes and is taking concrete steps to address these 
problems, albeit in mixed fashion.
    After recording the largest economic expansion in history between 
the late 1970's and the year 2000, China still relies on a state-run 
banking system which is weighed down by a high-level of non-performing 
loans. Capital markets are immature and the inefficient state-owned 
enterprises are a drag on growth. Added to these very real structural 
problems are problems resulting from reductions in public health 
services, diseases like HIV/AIDS, water scarcity, labor unrest over 
corruption and unemployment, and other issues generate serious 
dissatisfaction and will no doubt create frictions in China. China is 
working both domestically--putting greater emphasis on environmental 
protection, and establishing social safety net measures in recent 
years--and with many of its international partners to address these 
challenges but they are not subject to a quick fix. For example, China 
engages in dialogue with international financial institutions, whose 
assistance strategies are designed to improve the institutional 
underpinnings, efficient functioning, and sustained growth of the 
Chinese economy.
    We discuss these problems and possible approaches to resolving them 
with the Chinese, using the opportunities to promote better economic 
governance and encourage political reform in China. China's success at 
resolving these problems will have important implications for stability 
in the region as a whole; China's neighbors, no less than China itself, 
need a China that has clean and sustainable development, a healthy 
population, an economy that acts as a positive engine of trade and 
growth for the region, and a productive Chinese workforce.

    Question. Labor protests, some of them quite large in scale, have 
been sweeping parts of China for more than a year now. How do you rate 
the significance of this movement, and can we use it as an opening to 
encourage China's leaders to respect their obligations as a member of 
the International Labor Organization?

    Answer. Labor protests over the past year in China have increased 
in number but remain mostly uncoordinated and most are relatively small 
scale. Public anger at corruption and layoffs caused by the downsizing 
of the state-owned sector are the principle driving force behind recent 
protests.
    Chinese labor law allows ``strikes,'' but in practice there has 
been to date no national, coordinated movement that affects China's 
economic health or results in major social disruptions. While Chinese 
leadership is increasingly concerned over the number of protests, 
without a significant growth in scope and coordination, they are not in 
themselves likely to provide sufficient incentives to implement 
internationally recognized labor practices. The ILO is active in 
working with China to implement international labor standards that are 
not yet in place in China.
    The U.S. government is engaged in a number of programs to improve 
the conditions for workers in China. We have funded, either through 
State Department or the Department of Labor, advocacy and mediation of 
labor disputes, programs on labor law reform, work safety and health, 
mine safety, corporate social responsibility and protection of women 
and children in the workplace.

    Question. There has been some recent reporting in the press 
speculating that Hu Jintao and Wen Jiabao, who will take over as 
President and Premier this week, since they have both served in some of 
China's poorer regions, will take a somewhat ``kinder and gentler'' 
approach than their predecessors to managing China's economy and 
dealing with its myriad of social problems. Are there grounds for 
optimism that this will be the case?

    Answer. It is too early to tell exactly what policies the new 
Chinese leaders will implement, but both President Hu Jintao and 
Premier Wen Jiabao have given some early indications that they may 
focus more attention on improving conditions in China's rural and 
poorer regions.
    In his first press meeting after being confirmed as Premier, Wen 
noted that addressing rural economic stagnation and creating more jobs 
are among his main challenges. He also confirmed that ``only through 
continued reform and opening'' can China develop. So, although no new 
policy details have been announced yet, we do believe that the new 
leaders will continue and deepen the reforms started by their 
predecessors.

    Question. There is a report in Monday's Washington Post that 
Chinese journalists have been forbidden to report on a potentially 
serious new disease outbreak in Guangdong Province until after the 
meeting in Beijing of the National People's Congress. What does this 
imply about China's ability to live up to its trade and other 
commitments that require transparency and disclosure?

    Answer. The outbreak of Sudden Acute Respiratory Syndrome (SARS) 
was first reported in China's Guangdong Province in late November. 
Starting in mid-February, some information on the disease was shared 
with World Health Organization and U.S. Centers for Disease Control and 
Prevention (CDC) specialists, although they were not allowed to travel 
to the sites in question.
    Chinese media were reportedly not allowed to cover this outbreak at 
the time due to a ban on reporting ``bad news'' during the National 
People's Congress. China has shared data on SARS at the technical level 
with the U.S. CDC and the WHO and continues to do so.
    In recent years, Chinese authorities have banned public reporting 
on social issues such as health problems during politically sensitive 
periods. We cannot assume, however, a linkage between these acts and 
China's sharing of information under other agreements they have signed.

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