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March 23, 2000, Thursday

SECTION: CAPITOL HILL HEARING

LENGTH: 13427 words

HEADLINE: PANEL I OF A HEARING OF THE SENATE FINANCE COMMITTEE

SUBJECT: U.S. TRADE WITH CHINA

CHAIRED BY: SENATOR WILLIAM ROTH (R-DE)

LOCATION: 215 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

TIME: 9:34 A.M. (EST) DATE: THURSDAY, MARCH 23, 2000

WITNESSES: ROBERT KAGAN, CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE; JAMES LILLEY, AMERICAN ENTERPRISE INSTITUTE; RICHARD PERLE, AMERICAN ENTERPRISE INSTITUTE AND JAMES SASSER, FORMER AMBASSADOR, PEOPLE'S REPUBLIC OF CHINA

BODY:
SEN. ROTH: The committee will please come to order. This hearing is the second in a series the Finance Committee will conduct on China's accession to the World Trade Organization. And I am pleased to announce that this morning I and Senator Moynihan introduced in the Senate the legislation the president sent up to Congress that would enact permanent normal trade relations for China.

We will require the president's continued strong support, and the equally strong bipartisan effort here in Congress to ensure the consideration and movement of this legislation.

Before we get started, I think it would be helpful to clarify once again what the vote on PNTR for China is all about. The vote on PNTR will not decide whether China gets into the World Trade Organization. China will accede to the WTO regardless of how Congress votes on PNTR. And the question before Congress is whether our exporters will gain access to the Chinese market on the same terms as their competitors, whether after 15 years of arduous negotiations to open the Chinese market and encourage their adherence to a rules-based international trading system. We would now forgo the benefits of that deal. Under the WTO, if we impose conditions on our trading relationship with China, even in the form an annual vote, we will not have granted China the same access to our market as we have other WTO members. That in WTO terms would require us to invoke what is known as "non-application," meaning that we cannot fulfill the terms of our own WTO obligations with respect to China. In that event China would be entitled to deny our exporters access to their markets on the terms available to all other WTO members. The losers will not be the Chinese government. Some of the losers include heavily subsidized state-owned industries in China that are the principal source of labor problems. The losers will be American firms, American workers who will be denied the opportunity to compete on a level playing field with their British, French, German and Japanese competitors. The losers will also include Chinese workers who have no alternative but to work for state-owned Chinese firms that would deny them basic labor rights, or foreign firms that have in the past proved significantly less sensitive to labor concerns than have American firms.

As a technical matter, the passage of PNTR will simply remove China from the ambit of the Jackson-Vanik amendment. Our focus today is on whether removing China from the scope of the Jackson-Vanik freedom of immigration requirements has broader implications for U.S. national interests. And that issue has been joined by the administration's delivery of its PNTR legislation to the Congress in response to the concerns expressed by this committee at our hearing last month. The president sent us a clean bill that simply authorizes the removal of China from the scope of the Jackson-Vanik amendment upon accession to the WTO, provided that deal is consistent with the terms agreed to this past November between the U.S. and China.

China's statements since our last hearing, on the other hand, have continued to be troubling. In the run-up to the presidential election in Taiwan this past Saturday, the PRC raised its rhetoric to new levels of hostility. As in Taiwan's last presidential contest in 1996, the people of Taiwan chose to shrug off the threat from Beijing; and in another manifestation of the island's democratic maturity, the people elected a president from the opposition Democratic People's Party for the first time.

Lost in the sharp exchange of words has been Taiwan's consistent support for trade with China, and China's accession to the WTO. Just two days ago Taiwan's parliament dropped a five-decade-old ban on direct trade, transport and postal links between two of Taiwan's offshore islands and mainland China. And President-elect Chen was quoted in yesterday's LA Times as saying, "We would welcome the normalization of U.S.-China trade relations, just like we hope the cross-strait relations between Taiwan and China can also be normalized." Chen said, "We look forward to both the People's Republic of China and Taiwan's accession to the WTO." I think it's also important to remember that within China it's the hardliners and the PLA who are most opposed to China joining the WTO. And that's because they are the ones who most fear the forces China's greater economic opening will unleash.

The fact that Taiwan supports China's global economic integration, and PRC hardliners and the PLA adamantly oppose it, in my view, only makes support for China's accession to the WTO and passage of PNTR legislation more important.

We are fortunate to have a number of witnesses today, an array of experts who can address the impact of promoting or granting PNTR to China, and that country's accession to the WTO.

So with that we'll proceed. Senator Moynihan is necessarily delayed and will be here in a few minutes. So we will proceed with the first panel, which is made up of four distinguished witnesses. First, we are happy to welcome James Sasser, who is the former ambassador to China, and of course a former member of the Senate. It's a pleasure to welcome you, Mr. Ambassador.

MR. SASSER: Thank you very much, Mr. Chairman.

SEN. ROTH: And James Lilley is a resident fellow at the American Enterprise Institute and a former ambassador to China. If all please come forward. Robert Kagan is a senior associate with the Carnegie Endowment for International Peace. And finally we are delighted to have once again before us Richard Perle, who is a resident fellow with AEI and a former assistant secretary of Defense for international security policy.

We'll start with Ambassador Sasser.

MR. SASSER: Well, thank you very much, Chairman Roth. And it's a great pleasure for me to be here this morning, and I want to say hello to some of my former colleagues, who I see on this rostrum here whom I remember not only with great respect, but also with great affection.

I have the honor today of appearing before the committee to discuss with you what I consider to be one of the most important issues facing our country, and one of the most critical legislative items on the congressional agenda for this spring, and that is whether or not to establish permanent normal trading relations with China when they join the World Trade Organization, and the implications that this has for U.S. interests.

Now, I want to clarify one point at the outset, Mr. Chairman, if I may. I am here to talk to you today as a former ambassador to China and as a former member of the Senate. I hope that my personal perspective will be of use to you as you deliberate the merits of this legislation. I am not a spokesperson for the vice president of the United States or his presidential campaign. I know the vice president well, as many of you do. I served with him in the Senate, and I am familiar with his views on this issue. But my comments should not be received as the vice president's own position. I will leave that for him to articulate.

But when the president asked me to serve as our ambassador to China, which I did for three and a half years -- and I had the great pleasure of welcoming some members of this committee to China in that capacity -- I immediately agreed to serve because I felt that our relationship with China is probably the most important bilateral relationship our country has -- certainly one of the most important, and I think will be of continuing and critical importance in the 21st century.

China is a global and regional power emerging on the world stage. It's home to one fifth of the population of the world. It has an economy that is rapidly modernizing. It has been growing in the 1980s and part of the 1990s at a double-digit rate. It will continue to grow at a rate of about 7 percent this year. Some economists have characterized the Chinese economy as the fastest growing economy in the 20th century; some say the fastest growing in the history of the world.

It is a society that is looking more and more to the West in general, and to the United States in particular. It is also in its region a growing military power.

Our actions, and particularly the actions of the Congress on this legislation, can have a direct impact on China's future and on the future of Sino-U.S. relations. In my view, establishing permanent normal trade relations with China is vital to the interests of this country. This agreement will open the Chinese market to our goods, manufactured by our workers, our services, the service sector of our economy, which leads the world, and to our agricultural products. But, perhaps equally as important, it's going to promote openness in China. And it's going to require China to play by the rules. And I believe very firmly that it will advance American national security interests, and I think it will push forward the progress of human rights in the People's Republic of China.

Mr. Chairman, China will enter the World Trade Organization whether we like it or not. It's already become part of the world trading system. We could not stop that process if we wanted to. The United States is a market for 40 percent of China's exports. The only issue we have before us as I see it -- and others may differ -- is will Congress allow Americans to benefit from this historic trade deal, or are we going to reject it in what I would characterize as a misguided effort to punish China, only to find out later that we have only punished ourselves, our workers, our industrialists, our farmers, our high tech entrepreneurs, and our working families all across this country, as we look at the China market and see our European trading adversaries exploiting it, as we see the Japanese and others taking full advantage of it.

Now, let me add one important note. As I anticipate the other panelists will confirm, there really is a broad bipartisan consensus on this issue. Both the Democratic and the Republican candidates for president, as I understand it, agree that we need to pass permanent normal trading relations with China this year. Sure, we may differ on some of the details about China policy and who is best equipped to handle the job of president, but that's not why we are here today. We are here to present the case for establishing permanent normal trading relations with China, and the subject is very, very important.

I see that, Mr. Chairman, my time is up. You are running a very tight ship here this morning. And perhaps I could answer some of the distinguished committee's questions at a later date. Thank you.

SEN. ROTH: I would say to Ambassador Sasser and all the witnesses, your full statement will be of course included as if read. Unfortunately we are on a tight schedule, because we have votes at 11 o'clock. So we want to proceed expeditiously.

Mr. Secretary Perle, it is always a pleasure to have you here, and we would call upon you next.

MR. PERLE: Thank you very much, Mr. Chairman. Thank you for inviting me to participate. Like Senator Sasser, I think I should say at the outset that I am not here representing the vice president -- (laughter) -- or for that matter anyone else other than myself.

Like many Americans, I have tried to assess the security, economic and political interests of the United States in the rapidly growing trade relationship with China. I imagine that one reason anyway why the committee thought to include me in your deliberations was my involvement nearly three decades ago in a piece of legislation that became known as the Jackson-Vanik amendment after the name of its author Senator Henry Jackson and his House colleague Congressman Charles Vanik.

By linking trade to human rights, the Jackson-Vanik amendment significantly reshaped a piece of legislation enacted in 1974 that granted most-favored-nation treatment to non-market economies. It changed the administration's proposal to authorize the extension of MFN to state-controlled economies by requiring that the president first certify that doing so would lead to significantly freer immigration.

With such a certification, MFN status would continue from year to year. Without it, MFN treatment would cease. Because Jackson-Vanik was enacted so long ago, it may be worth a minute of the committee's time to recall why it became the first statute in nearly a century to link human rights and concessions on trade.

At the time of its introduction in 1972, the Soviet Union threatened to halt or greatly diminish the flow of immigrants by imposing a prohibitive tax on anyone wishing to leave. The adoption of the so-called education tax came just as the Nixon administration was asking Congress to extend MFN to the Soviets.

It was in that context that Scoop introduced his amendment to prohibit the granting of MFN status to any non-market economy that denied its citizens the right and opportunity to emigrate or that imposed unreasonable taxes as a means of controlling immigration. The amendment was eventually modified to allow the president to waive this restriction if and only if a waiver would promote the cause of free immigration.

At the time, the Soviets lobbied unrelentingly to defeat Jackson- Vanik. As part of the effort to defeat it, they dropped the education tax and allowed the number of immigrants, many of them of Jewish origin, to rise sharply. When it passed in 1974, after two years of debate, the Soviets responded by reducing the flow of immigrants to the level that obtained before the increase, aimed at discouraging the amendment's passage.

Eventually, that number began to rise again as the Soviet authorities struggled to contend with a linkage they abhorred but were unable to break. Hundreds of thousands were able to leave the Soviet Union and find freedom in the West, many in Israel and the United States, because Jackson-Vanik first gave them hope, and when they defied the authorities and demanded visas, protection as well.

Jackson-Vanik remains the law today, and it is with respect to the waiver provision of Jackson-Vanik that the question of MFN for China has arisen each year. The premise of Jackson-Vanik was simple. If the Soviet Union wanted trade concessions from the United States, MFN status and eligibility for credits, they could learn them by letting people go. Both the benefit to be gained and the price to gain it were clear.

The pragmatists in the Kremlin could make a choice. And it was a plausible choice. We were not asking Brezhnev's Russia to transform itself into a parliamentary democracy. We were not asking for free speech or freedom of political association, not because we did not value those instruments of democracy or believe in the human right to speak and associate freely, but because we thought such demands were more than the traffic would bear, more than we could reasonably hope to achieve. More exit visas was plausible. Democracy then was not.

Scoop believed that the right to emigrate was first among human rights, because it alone could end the suffering that resulted when citizens were denied any or all other human rights. Emigration was the ultimate escape to freedom. And countries that could not imprison their own people would be compelled to make life tolerable for them. Eventually this would lead to greater freedom.

I believe Scoop was right, and I urge the committee to support the continuation of Jackson-Vanik as it relates to Russia. The Russian door must never again be closed to emigration. The prospect of an annual review is the best chance we have of discouraging those in Russia who might wish to turn back the clock and again limit the flow of emigration.

I believe that in recent years, the demands made on the Chinese authorities as a condition for a presidential waiver, allowing MFN status to continue, have been far too ambitious. For unlike the choice Scoop sought to put before the Soviet leaders -- a focused, narrow quid pro quo -- the Chinese have been asked to accept a broad program of human rights that their controlling Communist Party could not survive. With comprehensive human rights in China, the communists wouldn't last a week.

I can stop there. I'm not far from the end.

SEN. ROTH: Go ahead.

MR. PERLE: If it were up to me, I would leave the waiver provision in place and use it to insist on exit visas for those brave Chinese reformers who run afoul of the authorities. But I would not hold MFN status hostage to an unrealistic insistence on comprehensive human rights in China.

Mr. Chairman, I believe that trade between the United States and China has been and can continue to be a force for liberalization. When private industry grows and flourishes, the citizens' abject dependence on the state is sharply diminished. An alternative source of wealth and material well-being means an alternative to the central power and control of the Communist Party, and that must lead to a lessening of the totalitarian authority with which the Chinese government now abuses its hapless people.

If we are on the side of greater freedom for the people of China, we will look for ways to encourage trade between China and the outside world. We will encourage the private sector in China and we will encourage the open flows of information without which a modern industrial society cannot succeed and prosper. And if we have an opportunity to return to it, I have a comment on the WTO, but I don't want to abuse the time limit, Mr. Chairman.

SEN. ROTH: Thank you, Senator Perle. I'll call next on Mr. Kagan and then Ambassador Lilley.

MR. KAGAN: Thank you, Mr. Chairman. And I do appreciate the committee inviting me to this hearing, and also just for holding the hearing. I think it's important that we look at our trade relationship with China, as we would with any other great power, in a broader context, in a broader strategic context, because the context is really crucial.

Everything depends, as we look at a trade relationship with a country like China, on what our expectations are of the future in a strategic sense. If we anticipate that everything is going to go smoothly, if U.S.-China relations are simply going to get better and better, if there's no prospect for conflict over any fundamental issues of interest, then by all means we can think of trade as an unmitigated benefit.

On the other hand, if one thinks that there is a danger of conflict with China, then one obviously would want to think of trade in a different context. You might want to think of trade as being one of the many elements of a strategy that you were going to apply to what could be a conflictual situation.

Now, most of the discussion about trading with China focuses on a very important assumption, that economic liberalization will lead eventually to political liberalization. This argument is embedded in every justification that I've seen for expanding trade relations with China. And we as Americans certainly like to believe that this kind of linkage exists. We believe it exists in our own country. We think we've seen it elsewhere.

But I think we have to acknowledge, nevertheless, that it is still a speculative question. We don't know exactly what effect economic liberalization will have on the political system in China. And more importantly, and I think crucially for our strategic interest, we don't know when this will occur. If one were looking at Germany in the 1890s, a time of rapid industrialization and economic growth, one would have anticipated that this economic liberalization would lead eventually to democracy; a functioning democracy in Germany. And sure enough, by 1950, there was a fully functioning democracy in Germany, and the only problem were the two world wars that occurred in between.

And I think we face a similar question. I don't mean to be comparing China to Germany, although many have. We face a similar question. Will the effects of economic liberalization, which our trade with China may, in fact, spur, will the effect happen in a time frame that is useful for our strategic purposes?

I fear that we just can't be sure that we're going to see an evolution in China soon enough to make a big difference for our strategic concerns. Since I think it is entirely possible that we could wind up in some kind of conflict with China over Taiwan -- perhaps not this year, perhaps not next year, but sometime in the next five years -- it is, for those purposes, irrelevant whether China becomes a democracy in 2025 or 2030 or 2040 if we're going to be in a conflict with China in the next five years over Taiwan.

If we might be engaged in a competition with China over the regional balance in East Asia, which I think is going to come at some point in the next 10, 15 or 20 years, it won't matter if China is a democracy in 2050 if we've already joined that struggle in East Asia. Now, again, as I say, it all depends on what one's perspective is. My perspective is we are in for some kind of strategic competition certainly, and possibly conflict with China, in a time frame that is going to be shorter than anyone, I think, in this room would expect a fundamental evolution of internal Chinese policy in terms of political reform.

It seems to me if you look at trade, then in that strategic context you have to begin to think of it as one element in an overall strategic approach to deterring conflict with China. And it seems to me if you do look at it in that broader strategic perspective, it seems to me you don't want to give away one very important tool of leverage that you may have with the Chinese. We certainly wanted to use such leverage when we were dealing with other competitive powers in history, certainly with the Soviet Union. I don't see why we would want to give up our ability to keep pressure on China, both in terms of deterring its external misbehavior and also in terms of affecting its internal political decisions.

It also seems to me that we've got to at least take into account the down-side effect of trade with China or the down-side effect of our making China a wealthier country. It seems to me if one is worried about a conflict with China over Taiwan or another kind of conflict, then one does not want to make it easier for China to have the money to acquire weapons which will eventually be used against us, like the recent acquisition of Soviet destroyers, the sole purpose of which is to deter the U.S. Navy. It seems to me we want to be very careful about the transfer of dual-use technologies.

I see that my time is going to come to an end, and I want to end on one very important point. The overall decision we're going to be making about trade issues with China are important, but so is the timing of those decisions if you're thinking in a strategic context. What I'm most concerned about right now is that the Congress's first official response to China's very, very serious, belligerent warnings to Taiwan before the elections, the first official response will be to vote permanent normal trade relation status for China. I think that will send a very bad signal to the forces in China. I think it will encourage hardliners within the regime to be able to argue that "We can take a belligerent attitude toward Taiwan, and the American response is to give us permanent normal trade relations status, not to warn us."

So my final point would be, whatever else Congress does, I would hope either that it will delay the vote on permanent trade status for some months, until we can see how China responds to the election of Chen Shui-bian, or at the very least that it will pass the Taiwan Security Enhancement Act as its first official response to Chinese belligerence, not PNTR.

Thank you. I'm sorry I went over.

SEN. ROTH: Thank you. Ambassador Lilley, we're delighted to have you. We saved you for last because we understand that you have just returned from Taiwan, where you observed the elections. We're eager to hear what you have to say about that as well as China-U.S. relations. Welcome.

MR. LILLEY: Well, Mr. Chairman, in response to your suggestion, I have here Taiwan elections as my first point; second point, the Asia Development Bank case as a practitioner in how to get things done; third, U.S. arms sales to Taiwan and the coming together historically between China and Taiwan; and fourth, what the U.S. should do.

Let's start with a few comments. I will also deal with this in a wider context. I have heard this term, "We will listen and watch," about 77 times. And it is a technique on the Chinese part both to buy time and to make you the guilty party, to make you prove yourself to them. But at least it means that they're going to shut up for a while in terms of their belligerence.

I don't think it should get into our vernacular like "renegade province" and "pro-independence candidate." This is sort of our media stirring up the pot, getting both China and Taiwan angry. But let's get to the Taiwan election. It reminded me of the last hurrah of Frank Covington (sp) and the Irish in Boston. It isn't the last hurrah; it's the second hurrah, the second time of the 5,000 years of history in China we've had an election and had a man elected. But it's terribly important. And I think the message probably should go over to China that you can change things by the ballot box and not power out of the barrel of a gun. I think that's very important.

Who was the winner and loser in this election? Let's look at China, first of all. Yes, everybody runs around and says they lost. They lost face because the pro-independence candidate, Chen Shui-bian, got elected. Let's look at it another way. China was the winner. First of all, their nemesis, Lee Teng-Hui, millions of words of invective put all over this man, supported by Americans -- he's licked, he's finished. He's probably going to resign tomorrow. Why can't China declare a victory and stay home? They won on this one.

Number two, Chen Shui-bian, the so-called pro-independence candidate since 1991, has moved to the center -- significantly. He didn't mention independence once in his statement as he won. China's won this one. Declare a victory, again.

Number three, through a myriad of sources they let everybody know that James Soong was their man. He came within 2 percent of winning. He was very popular, he was all over the island, and he supports no theater missile defense for Taiwan, no Taiwan in the U.N., and the opening of the free communications with China. He's from the Mainland. So all I'm saying is China can declare a victory.

But it's very important. We're dealing with some very delicate things in Taiwan right now. First of all, there's a very nasty rumor spreading all over the place that Lee Teng-Hui in fact support Chen Shui-bian. I can tell you the "pro-independence candidate," -- quote, quote, he did not. He he got a poll maybe two weeks before the election telling him that his man, Lien Chan, was 10 percent behind. He was furious: "Get me another poll." They came back and said he's 6 percent ahead. "Thank you."

He was for this. Number two, there's a very nasty rumor going around that James Soong and Lien Chan colluded with China to get the Zhu Rongji warlord speech to discredit Chen Shui- bian as a war candidate. And it almost reminded me of the '64 election between Goldwater and Johnson, when you had a picture of a little girl and a flower and the mushroom cloud. They were saying Chen Shui-bian is the war candidate. The people in Taiwan, the people in China and the sycophants here -- all saying this is the war candidate.

They're trying to grab smoke. He said all the right things. So I say: China, look at this thing as a victory.

Second, Asian Development Bank case. We get this statement made all the time that China cannot compromise on the issue of sovereignty and unity. Wait a minute. Get to the real world -- in a practitioner's sense. We had a case in 1985 where China was in the Asian Development Bank -- I'm sorry. Taiwan was and China wanted in for reasons of money.

The first position taken by China and the American supporters here was Taiwan gets out, World Bank formula. China comes in, Taiwan out. Two Chinas otherwise. You can't do it. Violates communiques.

Two and a half years later, both were in. Why? Number one, Taiwan needed security. They got the Indigenous Defense Fighter. We showed them that we supported their security.

Number two, Taiwan accepted a move that would dilute their position on sovereignty -- a, mainly Republic of China became Chinese Taipei.

Number three, China compromised because we have two Chinese entities in the ADB, an official organization.

I'm saying that works. Now, arms sales and coming together. Everybody runs around saying "Arms sales are disruptive" -- of Taiwan- China relations, of U.S.-China relations. It's a bad thing. History doesn't support that. We gave Taiwan assurances through the Taiwan Relations Act in April '79, bipartisan -- both houses of Congress.

Six months later, Ye Jin-ying (ph), the Marshal, comes out with his nine points, one of which was peaceful reunification -- no more liberation. Second case -- early 1980s. We supplied Taiwan with arms all the way through. President Reagan gave them spiritual support. What happened? They opened up to China -- in 1987, unprecedented opening, because Taiwan had the confidence to move ahead and China responded.

Number three, F-16 sales in September of 1992. Everybody screams and yells this breaks the August communique, this is the end of the world, hysterical memos come out of State, we can't do it. What happens? Two months later, China and Taiwan agree on a One China formula with different interpretations.

Four months later, they're sitting down in Singapore and talking for the first time since 1949. So I'm saying not necessarily this is going to change anything. You've got to be very skillful, your timing has to be good. But obviously, you can't make that case. The other guys have to make the case.

Finally, what should the U.S. do? Econ globalization -- is in our interest. And WTO is part of this process. The way people are fighting it in China tells you how good it is: the bad guys don't want it. Give it to China. It's very important. But it's a good deal for the United States, but we should not run around saying it's going to change China. That is peaceful evolution. That feeds the hardliners. They'll say "See? It's a trick by the Americans to cause problems in China, to change our regime."

We're doing it in America's national interest. Nixon said that when he went to China in 1972, and the Chinese have never forgot it. They said "We finally met an honest American, Richard M. Nixon." With no force, the U.S. has to do that. Our role is no use of force. Stick to that one, it works, it keeps war away.

Third, support Taiwan in its hour of need. I'm not saying you give them everything they want, but I'm saying right now with the difficulties in transition, it is rough -- I can tell you. This man has to take over a very complicated situation. If we pull the rug out from under him or if China starts to threaten, it's a bad show.

And finally, we have to manage our affairs with China very well in this context. We have to give them incentives and disincentives for what their behavior is. We have to encourage them to go on a peace offensive. We have the tools for it. Taiwan Security Enhancement Act, arms sales to Taiwan, the Geneva talks on human rights.

If you get a balance here and a multi-faceted policy towards China, which deals with military adventurism and brings out the economic strength, I think you'll have a good policy that will work. Thank you.

SEN. ROTH: Thank you, Mr. Ambassador. Ambassador Sasser, having worked with the Chinese in many areas, how would you judge the likelihood that they will abide by their commitments to open the Chinese markets?

MR. SASSER: Well, Mr. Chairman, I think that they will make a concerted effort to abide by the commitments of the WTO agreement. They've already set in place educational efforts to try to educate the officials out in the provinces at the lower levels of their bureaucracy as to how these strictures of WTO will affect them.

Now having said that, I think we've got to be realistic. It's going to take the enforcement of the WTO provisions -- and the opening of the market is going to be uneven, I think, in certain areas of China. But the government itself I think is going to make every effort to try to live up to their agreement, as far as the WTO is concerned.

There's an old saying in China that "The mountains are very high and the Emperor is far away." And the thrust of that is that sometimes on a local level you can do what you want to independent of what the central government wishes to be done. The central government is aware of that. And they're -- as I say, they're making efforts now to try to instill the discipline to enforce market openings and WTO strictures already. But it's going to be, frankly, an uneven enforcement at the outset. And it's going to take some time. We can't expect enforcement instantly.

I think the best example of that is the -- (inaudible) -- is the intellectual property rights agreement that we entered into with China some years ago. Initially, the enforcement from our standpoint was unsatisfactory. We came to the point of -- we had some very pointed discussions, even acrimonious discussions with the Chinese government over that.

But eventually, they got their enforcement act together and now their enforcement of intellectual property rights with us I think quite well. And I think that bodes well for the market opening that we can anticipate in the future.

SEN. ROTH: Mr. Perle, you have been a tireless advocate of our national security interests throughout your career. In your view, would the advance of the NTR that would allow our exporters access to China markets be inimical to our national security interests?

MR. PERLE: I don't think that grant in itself in inimical, Senator. But I do believe that within the context of trade between the United States and China is on balance a good thing. There is a great deal we could do to mitigate some of the dangers. For example, our policy with respect to the export of sensitive technology has been dangerous. Whole factories producing advanced military equipment in the United States have been dismantled and shipped to China, where they are now engaged in developing their military capability. I think we have -- (audio break due to equipment failure.)

So while in general I think that the (connection ?) of the private sector and trade between our private sector and the Chinese private sector is a good thing, we should be very careful about the export of advanced and sensitive technologies. And I believe we should draw the distinction between business with the private sector and the state enterprises in China and in particular those state enterprises that are run by the Chinese military. It seems to me quite foolish for us to be customers of Chinese military enterprises, which only has the effect of strengthening them to the detriment of our friends and allies and ultimately the United States.

SEN. ROTH: I'd like to ask both former Senator Sasser and former Defense Secretary Perle, if you were advising the president, and I know you both have said you don't speak for anybody but yourself, what would you advise the next president to adopt as the key principles of our China policy? Mr. Sasser?

MR. SASSER: Well, I think the first thing would be to continue to the policy of engagement with China, to continue to engage China on a broad front -- diplomatically, economically, military exchanges -- to try to continue to build on those areas of cooperation which are essential to both of us from the national security point. That is, control of weapons of mass destruction, continued cooperation on keeping a nuclear-free Korean Peninsula, continued and enhanced cooperation on trying to deal with the problem of nuclear proliferation in Southeast Asia.

A whole host of -- a whole constellation of things that I think really fall under the category of engagement. And part of this is our enhanced economic relations. And I said earlier that the United States market is a target for 40 percent of China's exports. One of the important realities, I think, of normal trading status for China is this opens up the Chinese market to American exports. And I think this is going to be a very valuable economic tool for American manufacturers, American workers, our service industries, et cetera.

But equally important, Mr. Chairman, I think that as more American business expands in China, it's going to have a very liberalizing effect on the political regime there. I have seen that with my own eyes.

SEN. ROTH: Thank you, Mr. Ambassador. And Mr. Perle.

MR. PERLE: Well, Senator, I had a chance to observe Chinese commercial practice at close hand. And it would be hard to imagine a more outrageously predatory behavior than that practiced by Chinese industry and especially the state-run industries.

They'll lie, cheat and steal on a breathtaking scale. It would be a great mistake to expect a level playing field, because in China there is no level playing field, not even for private Chinese enterprises, much less foreign ones. And any business with experience in China, I believe -- whether American or European -- will tell you that.

Now, what should we be doing? What should the next president do? That in fact was how I would have ended my prepared remarks, so I can be very brief about it. First, with respect to human rights, we would zero in on plausible objectives, like freer emigration when emigration is most necessary to protect those who are engaged in the struggle for human rights. We mustn't allow people who are trying to improve the human rights situation in China to languish in jail. In the extreme case, they must be permitted to leave China.

Second, it would comprehend the liberalizing potential of the growth of the private sector in China, and it would avoid in every possibly way strengthening corrupt and dysfunctional state enterprises, which in fact are a drag on the economic development that we all hope will bring about political change.

Third, it would have a security dimension in which we would think twice before importing or exporting services and technology with significant military implications. There's no reason why we should be buying products from the Chinese military industries, and there's no reason why we should be exporting sensitive technology that is only going to develop their military capability.

And finally, we should clear, and clearly skeptical, about the benefits to be found in Chinese membership in the WTO. It is not self-enforcing, and unless we enter this with a plan for a vigorous defense of our rights under the WTO, when those rights are violated, as they surely will be, we will bitterly disappointed. So, we should go into this our eyes open.

SEN. ROTH: Thank you. Our time is running out. But Ambassador Lilley, let me ask you, would the grant of PNTR in any way undercut our ability to advance our interests with the Chinese or with our strategic partners elsewhere in the area?

MR. LILLEY: I think Permanent NTR would in fact advance our strategic interests, both with China and our partners in the area. I think the -- our partners in the area were appalled when we attached human rights conditions to MFN in 1993. There was universal condemnation of that move. Not that we have to follow their lead, but when you're all alone out there, it's not so good.

Second, in terms of China, I think basically that you are feeding the forces of change, but I would stress, don't blow your horn on this one, because you're going to feed the guys inside that don't like it, and there are a lot of them don't like it. We so that in Joe Fusmith's (ph) analysis of the WTO decision in China, where he really outlines the power blocs that when after Zhu Rongji when he came back after his disastrous trip here in April. They tore him to pieces, but he prevailed with Jiang Zemin help in November, after -- over great opposition. So, my sense is you're feeding a system that helps our exports, and that is the way I think we should sell it. It helps the United States.

SEN. ROTH: Senator Moynihan.

SEN. MOYNIHAN: Mr. Chairman, I was, as they say, necessarily detained, and I haven't been able to welcome my old colleague and friend, the ambassador, Mr. Perle, Ambassador Lilley. I'm going to yield my time to the others today. But can I just note that there has been considerable progress since, on this matter, since the first hearing which you held a month ago. And for the information of all, this -- we finally got from the administration the bill that they would like us to pass. And Senator Roth introduced it this morning with myself as a co-sponsor, and I think we're going to look forward I believe you plan to mark-up a bill within --

SEN. ROTH: Very quickly, that's correct. And we, of course, hope to keep it clean.

SEN. MOYNIHAN: Keep it clean. Thank you, sir.

SEN. ROTH: Yes. Next, Senator Grassley.

SEN. GRASSLEY: I'm going to start with Ambassador Lilley. And this is a very general question, and maybe not as easier to answer as shortly as I'd like to have you, but we have this kind of debate going on, whether or not the United States should view China as a strategic partner, as the president has put it, or more as a strong competitor with certain shared interests. And I'd like to have from your expertise what model of U.S.-China relationship is in our best national interest as you see it in the broad scope.

MR. LILLEY: Well, Senator, certainly in the 80s, China was a strategic partner, but we didn't call it that. We worked with the Chinese to destroy the Russians in Afghanistan and then contributed to the fall of the Soviet Union. We worked with them to get a piece agreement in Cambodia and the Vietnamese pulled out. We worked with the Chinese very effectively to cover Soviet nuclear and missile developments from our Northwest sites -- a very successful effort. That was strategic cooperation. That has since evaporated, because we differ on a number of major items. First of all, the Japan-U.S. Security Treaty. The Chinese are dead set against it. We are expanding it. Number two, we differ on the use of force and the developments in Taiwan.

As you know, we sent aircraft carriers in March 96 and two years later we were saying we had a strategic partnership with them, or we're working towards that. I don't think you get things done by attaching labels to them. You get the things done first and then, then you can perhaps make a convincing case that you have a cooperation. Right now, it seems to me, to use an old Chinese expression -- (in Chinese) -- looking for areas of agreement and you're putting aside major differences. We have a reason to agree and to work with them on trade matters, on proliferation, on other areas like -- and North Korea. We are not working with them on Japan, specifically, although we're trying to move in two tracks. We're trying to get something done there, which doesn't become confrontational but more cooperative.

And right now, as I say in my testimony, there is a chance in Taiwan to get the Chinese to begin to come around on this issue. And if we play it right, you'll be able to build a situation in Taiwan where we're actually working more in parallel. Once you get that done, then you can talk about strategic partnership.

SEN. GRASSLEY: My next question would be to Senator Sasser. And I'm cognizant of what you said in your very first sentence, that you weren't here representing anybody in the administration, but my question gives me an opportunity to put out a frustration that we Republicans have sometimes when the president takes a stand on trade issues. So, let me read this question and then ask you to respond if you can.

The president obviously is pushing very hard for PNTR with the submittal of his bill, but we're concerned about the level of the president's zeal for the bill. There's a lot of us here who remember that in 1997, President Clinton appeared to be working at the 11th hour for the passage of legislation to renew the president's fast track trading negotiating authority, but he ultimately caved when faced with heavy opposition from labor union membership. And he even blamed so-called Republican isolationists for his own failure to win approval of his own bill. My question is, what is your view about how hard the president will work to get this bill passed, given the heavy labor union opposition? And do you think that if he doesn't succeed, he's going to blame Republicans for it?

MR. SASSER: Well, as I've said -- let me say to my good friend Senator Grassley once again, I am not here speaking for the administration. And -- but -- and I don't really know what's on the president's mind, other than judging by his actions. And it appears to me that the president and this administration are dedicated whole- heartedly to trying to secure passage of PNTR. The president himself has made at least one very forceful speech, and I think perhaps a second within the last, within the last three -- within the last three weeks. Secretary Daley has been put in charge of the overall operation to try to secure passage. My understanding is that they're running a so-called "war room" operation, both of the White House and out of the Department of Commerce. Secretary Daley himself has started a comprehensive speaking tour across the United States. He's conducting a tour of China, I think, with some distinguished members of the Congress, some of whom may be on this committee.

So, it's my sense that this administration is very much dedicated to this. They fought hard and worked very hard to get this agreement on WTO with the Chinese, and they certainly don't want -- the Chinese government -- and they certainly don't want to see it go down the drain because they can secure permanent normal trading status.

Now, if it fails, whether or not the president will blame the Republicans, Senator Grassley, I have no idea on that subject. We'll just have to wait and see. Your guess is as good as mine.

SEN. MOYNIHAN: I'll give you a hint, Jim. (Laughter.)

SEN. GRASSLEY: Secretary Perle, let me quickly ask a last question, that I think you know a lot about military things around different countries. Critics of Permanent Normal Trade Relations for China say that China's military aggressiveness and the fact that China recently implemented a 12 percent increase in its military budget are reasons to oppose PNTR. But I think that you could probably make a case that these are reasons to vote for it. That's because China's military gets a lot of its funding from the businesses it owns. If those businesses are forced to compete in the open market, they would be a lot less profitable. So, these two questions: Do we know exactly how many businesses are run by the People's Liberation Army? And exactly what, if any, is China trying to do to protect these businesses from new and open competition.

SEC. PERLE: Senator, I can't tell you the number. It's possible that somebody could hazard a guess. But, as in all state-controlled economies, the linkages among state-operated entities -- military and non-military -- are significant and now always readily apparent. Within the overall context of growing trade between the United States and China, which I think has benefits that we should welcome, there is room, there is scope to try to limit the extent to which one result of that trade is the strengthening of the Chinese military. I've seen no serious effort within the current administration to device a set of policies that could achieve that purpose.

So, for example, we have been profligate in the transfer of sensitive technology. We have done things like encourage the development of industries that directly benefit the military capabilities of China -- for example, the space launch industry. So, I would hope that the committee, in considering whether to recommend a yes or a no vote on the larger proposition, would think hard about ways in which policy, including policy mandated by statute, could be developed that would mitigate the adverse consequences of this expanded trade, which would be a strengthening of the Chinese military.

MR. SASSER: Could I just amplify on that for a moment, Senator Grassley? Two years ago, if memory serves me correct -- or two and a half years ago -- the Chinese government embarked on a program of divesting the People's Liberation Army of businesses. Now, that has gone along fairly successfully. Many of those, those businesses range from being in the grain business to be in the scotch whiskey importing business, all up and down the line.

Now, the government moved to get the PLA out of these businesses because one, it was a major source of corruption in the system. And they've done pretty well in moving them out. Now, I think we in the United States ought to have a mixed feeling about that, because when you had a People's Liberation Army that was more interested in making profits and more interested in, perhaps, smuggling operations, or interested in running their businesses than they were in running their military, they were much less, I think, formidable from a military standpoint. But I think we can say with some degree of certainty now that the military, their business activities have been sharply curtailed.

Now, this is one reason you're seeing the Chinese military budget go up, because many of the profits from these businesses were used by local military leaders to house the troops, to feed the troops, the clothe the troops, and that sort of thing. So, as the business activity goes down, there's been a necessity to raise the military budget itself simply to sort of maintain the status quo.

So, I for one am not alarmed by these statements about a 12 percent increase in the Chinese military budget. A 12 percent increase in the Chinese military budget still, by the most optimistic figure, puts it at $45 billion. The last time I looked at the CIA website, they were saying the Chinese military budget stood at $9.8 billion, which, of course, I think is an understatement. But when you contrast the Chinese military budget with the budgets of the Republic of South Korea, certainly with the budget of Japan, they are below, I think, both of those countries. As a matter of fact, the most powerful navy in the Pacific, the Northern Pacific now, is the Japanese navy, with the Russian navy rusting, Far Eastern navy rusting in Vladivostok. So I am not concerned. I don't share Dr. Perle's concern about the increase in the Chinese military budget.

SEN. GRASSLEY: Thank you, Mr. Chairman.

SEN. ROTH: Senator Robb.

SEN. ROBB: Thank you, Mr. Chairman. And thank you for this hearing. It's an important topic, and you have got some distinguished witnesses, and another panel to follow. I am resisting the temptation to put on my former foreign relations hat or my current armed services hat with these particular witnesses, because they have appeared before those committees and we have benefited from them.

Let me ask one question of all four of the witnesses for this panel, if I may. Implicit in many of the discussions that we have had about whether or not to grant permanent NTR, or whether or not WTO is a good thing, notwithstanding our ability to influence that particular decision, is the question of how much does U.S. policy toward China and Taiwan actually influence decisions and actions that are made by the Chinese government. Senator Sasser, would you take that one?

MR. SASSER: Well, I think that's an excellent question, Senator Robb, and there is -- a wise old politician said one time that all politics are local. And I think that's certainly true in the People's Republic of China. There I think their political system is driven by what the leadership views as their political needs. One of their political needs to some extent is to enjoy a good relationship with the United States. I think that's secondary to other domestic political needs. And their domestic political needs, number one, are to keep that economy going and keep it rolling.

What you have here is a leadership in China now that these are not the old revolutionaries. They don't get their legitimacy to rule because they were Mao Tse-tung or Deng Xiaoping. The leaders of China now are technocrats, and they don't get their legitimacy from the ballot box as the members of this committee do --

SEN. ROBB: But are Jiang Zemin and Zhu Ronji actually influenced positively or negatively by our actions is the question?

MR. SASSER: Well, and I am going to get to that.

SEN. ROBB: Okay.

MR. SASSER: Their legitimacy comes now from being able to grow that economy and elevate the standard of living of the Chinese people. Now, if that economy stalls out they are in serious trouble. Part of the ability to grow that economy is through international trade, and the United States is a large factor in that. So they need to meet their internal domestic political needs, but part of those internal domestic political needs are growing the economy, and the U.S. is part of that, because we are a large market for them and we are a source of direct foreign investment in their economy.

SEN. ROBB: Secretary Perle -- thank you, ambassador.

MR. PERLE: Of course the government doesn't control that economic relationship, so the Chinese benefit from that relationship independent of what the government may think about it, senator.

But I -- there is one area where what we do is vitally important, and that is with respect to Taiwan. If the United States is resolute in the proposition that differences between Taiwan and the People's Republic must be settled without resort to force, and if we are prepared to assist in the defense of Taiwan, should China test that, then I think there will be no military action, no significant military action in the Taiwan Straits. If we are unclear, ambiguous, if we make empty gestures, then I think we run a significant risk that there could be military action. So in this one particular, what we do rather more than what we say, but what we say is also important -- what we do is vital to the peace and stability of the region, and to the protection of Taiwan, and the protection of any hope for a peaceful evolution there.

SEN. ROBB: Could I just get a brief answer? I didn't realize that my time would expire with a single brief question. But, Ambassador Lilley and Mr. Kagan, could you just add anything that you might want to add to what direct influence it has on the actions taken by the Chinese in their policy?

MR. LILLEY: Yes, I would say -- clearly I was involved in one of these in 1977 when we went to them with original prospects on risk oil contract, which led about a year and a half later Deng announced his economic opening and reform. I am not saying these are connected, but I am saying he broke the whole monopoly system of state-owned enterprises and invited foreign investment in, because the Americans were there in '77 telling him we would do this.

And I think, second, I agree with Richard Perle that if you draw the line about their military venturism in the Taiwan Strait they will behave better. You will get better actions out of them, and they will turn to other means to influence Taiwan when the military option is closed.

SEN. ROBB: Thank you. Mr. Kagan?

MR. KAGAN: I just would say I think the Chinese are consumed with what the United States thinks or does on any given issue, whether it's economic or military. We are foremost in their thinking in terms of their ambitions in the region, their ambitions as a power, our effect on their political and economic system. I don't think they take practically any decision without calculating what the United States is responding, and I think we can see it right now in terms of their efforts at trying to keep the lid on their own rhetoric as this vote is pending with regard to Taiwan.

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

SEN. ROTH: Senator Mack.

SEN. MACK: Thank you, Mr. Chairman. And first I want to welcome back Senator Sasser. It's good to see you, and I appreciate so much the hospitality that you showed Senator Lieberman and I when we visited China a few years ago, and again --

MR. SASSER: It was our pleasure. Thank you.

SEN. MACK: It's good to have you back.

I want to first pose a question I think to Robert Kagan, and it has to do I think with -- you touched on this in your statement, there is an idea that trade is a miracle tool that brings about liberalization of politics, the economy and so forth. And people draw from that that the collapse of the Soviet Union occurred as a result of trade. What are your thoughts with respect to that?

MR. KAGAN: Well, it's a good question. I am glad you brought it up. I even read the Wall Street Journal's otherwise always intelligent editorial -- recently suggested that somehow Americans trading with the Soviet Union was ultimately what brought down communism. And I was rather astonished to read that, and I am sure Richard Perle would be astonished of that view, since in fact the opposite is what occurred in the Soviet Union. Gorbachev undertook political reform in order to achieve economic reform. One of the reasons he carried out the glasnost policy was to try to break through the entrenched bureaucracy which was opposing economic change. So as a matter of fact, in the Soviet Union political change preceded economic reform; it was not the other way around. And U.S. trade with the Soviet Union was negligible in that period. And so I do think it's important, because there is a certain kind of sloppy comparison made -- I don't know what it is made -- between how the Soviet Union fell and how Chinese communism might fall.

SEN. MACK: Thank you. Secretary Perle, I want to raise a question that also involves Russia. If China is granted PNTR, and is accepted into the World Trade Organization, should Russia expect similar treatment?

MR. PERLE: Certainly not, if one is looking at this from the point of view of American interests. I think it would be a great mistake to do in the case of Russia what is proposed in the case of China, which is to abandon the Jackson-Vanik requirement for annual review. The annual review as it relates to Russia is still implemented in the narrow, but I think effective, context in which it was initially proposed; that is, the only issue on the table is free immigration. And because immigration from Russia now is free it is not really an issue. But that amendment remains in the event that there should be an unanticipated change in Russia and a new leadership is tempted to shut that door once again. We have in place a piece of legislation of historic proportions as it relates to Russia. I think it would be a tragedy to remove it and offer even a slight encouragement to some future Russian leader. And we don't know what is going to happen in that troubled country to revert to the old policies of imprisoning its own population.

SEN. MACK: Very good. Ambassador Lilley, let me ask you a question with respect to Taiwan. I would like to get your thoughts on Taiwan's accession to the WTO. Specifically I would like to hear your thoughts on the likelihood of Taiwan entering the WTO alongside the PRC.

MR. LILLEY: Well, I think Taiwan should definitely be in. I think the deal has been made implicitly that Taiwan will enter right after the PRC. I don't think this is in writing, but I think this is an accepted situation.

SEN. MACK: You don't anticipate that China would block --

MR. LILLEY: I think they might play games, yeah. I have it in my testimony. I think Taiwan is concerned that at the last minute they'll change this business of Taiwan entering as the customs territory, and then they'll probably stick in something the customs territory or China, or do some one-China maneuvering on this at the last minute, and see if they can get Taiwan to give on this to get into WTO.

So I think you ought to watch for that, and make it quite clear for China that the deal is already struck, that this leads to greater economic cooperation between the two sides, they can deal in that forum as equals -- all this sort of thing. It would be very good for both sides to be in there, but I am afraid you are going to have to see Taiwan, which has already met all the conditions, come in slightly after China.

SEN. MACK: I wonder if I might get Ambassador Sasser and Secretary Perle's response to that.

SEN. ROTH: Yes, please proceed.

MR. SASSER: A response to your question about Taiwan?

SEN. MACK: Yes, and its entry into the WTO and the timing of that entry.

MR. SASSER: Well, quite frankly, from my conversations with elements of the Chinese leadership, I get the impression, the strong impression -- in fact, they stated that they anticipate Taiwan will enter WTO. Their stipulation was that China come into the WTO prior to Taiwan. Their apprehension was that Taiwan might beat China into WTO. But my impression is that they -- once China ascends to WTO that they anticipate and expect Taiwan to come in.

MR. PERLE: Well, senator, there is no substitute for a clear understanding on a matter like this, and I see no reason why a clear understanding should not be achieved before China is admitted to the WTO. It need not necessarily be made public, but it should be clear, unambiguous and resolve all of the issues so that the temptation to which Ambassador Lilley referred is resisted.

SEN. MACK: Thank you very much. Thank you, Mr. Chairman.

SEN. ROTH: Senator Baucus.

SEN. BAUCUS: Thank you, Mr. Chairman.

Ambassador Lilley, you've -- you were our ambassador in China, in Korea, and represented the United States in Taiwan -- in Korea and Taiwan helped I am sure helped forces of democracy, and those countries have changed from authoritarian rule to by and large democratic countries. Is there anything fundamentally different in China that would prevent the same change? And kind of part of that is how much would an affirmative PNTR vote help that change? I'm just curious -- you've been to all three, you know all three quite well.

MR. LILLEY: At the risk of being facetious, yes I was in Taiwan and Korea at the coming of democracy, but I didn't do it -- they did it.

SEN. BAUCUS: I got to give you some credit --

MR. LILLEY: Although I was a CIA operative for a number of years, when I went to China in May of 1989 the Chinese had subsequently come out with the accusation that I did the whole Tiananmen thing, which is a little beyond my capabilities to organize 300,000 people in two weeks. But, anyway, I get this accusation of being the black hand there. And I might say that particular effort failed.

This is a very complex question, senator. There are unquestionably forces in China that want to see this kind of change come, and you get it all the time. There are people that have over in Taiwan watching the election. They are watching it on TV and they are fascinated by it. Yes, it's bad mouth, it's corrupt, black gold. It isn't -- it's a provincial election, and they want very badly to discredit Chen Shui-bian. And I don't think we want to fall into that trap. They discredited Lee Teng-Hui, perhaps with a little bit of help from him, but we jumped on that one and tried to make him the guy that caused the downturn in U.S.-Chinese relations.

But my sense is there are forces moving in China, but we have to be very careful about championing them inside China. I know at times we've tried to have our assistant secretary see Wei Jingsheng, at the time of Secretary Christopher's trip. It really hurt Wei Jingsheng. And I know when I was there, President Carter came through and wanted to see the dissidents, and we told him not to do it. Yes, it looks good back in the States, but you really hurt them.

My own sense is there are three instruments to begin to affect the democratic process in China, or four. First, protect Taiwan. Don't let that democratic process be taken over by force. Number two, try to help all you can democratic forces in Hong Kong. Number three, I think it's the rule of law that we introduce into China that really undercuts the capricious, paternalistic efforts of the party to interfere with the judicial system.

SEN. BAUCUS: Does WTO help there?

MR. LILLEY: I think it does, yes. But don't jump on it and say this is peaceful evolution. Be very careful about that. You really might hurt the process, because there are guys in China who really don't like this at all, and they'll go after it if you keep feeding them that "We're going to change your system" by bringing in all of our businesses and our thoughts. Yes, there is elements of truth in that, but I think it's very important you handle this with some subtlety.

And finally, I think these village elections that we worked with, we've had Republicans and Democrats over there working with these elections. It's not changing China very much. But they're seeing that the election process doesn't necessarily bring about the downfall of the party. In fact, party people win the elections when they have a good program. So I think elections, rule of law, protect democracy where it exists. And I think still, in the human rights talks in Geneva, we stand up and bring world pressure on China to change. They hate it, but I think it has an effect.

SEN. BAUCUS: Yeah. I'd just like to ask the other panelists. Doesn't China's interest in WTO and also an affirmative PNTR vote, which, after all, is only getting China the same trade status that we give virtually every other country, in return for a vast opening of markets in China, in services, products, distribution systems, investment and so forth, doesn't that help the forces of reform rather than hurting the forces of reform, with the caveat we don't tout it?

MR. SASSER: Can I answer that, Senator Baucus?

SEN. BAUCUS: Yeah.

MR. SASSER: I think that's a very, very important question. One of our panelists a moment ago, and I think quite accurately, characterized what happened in the Soviet Union, the old Soviet Union, when he indicated that Mr. Gorbachev sought political change as a way to perhaps foster later economic change. And Gorbachev went for political change faster than the economy could satisfy. In other words, the economic expectations of the Russian people were elevated, and the old economy, the old Soviet economy, couldn't transition fast enough and satisfy them.

Now, the Chinese say, "We're not going to make the same mistake the Russians made." And so what they're looking for is to fashion and build an economy that later on will meet the political demands or the popular demands of a population that's moving in the direction of a liberalized political structure.

Ambassador Lilley spoke a moment ago about the village elections. When Premier Zhu was asked not too long ago about whether or not village elections should be expanded to a higher level, to the county level, his answer was, "The sooner, the better." And, of course, Premier Zhu Rongji is the primary catalyst now behind pushing WTO and getting China into the WTO organization.

So I think you can make a case that the Chinese are coming at it differently from the way Gorbachev did. Gorbachev was a reformer, and he knew that that system had to be reformed and modernized if it was to survive. He tried to reform it politically, and the economy collapsed out from under it. I think some of the more enlightened members of the Chinese leadership are trying to reform this economy, and the economic reforms that come and the internationalization that will come in China will in turn have a salutary impact on liberalizing the political system.

Now, it's not going to make it into a western democracy overnight and it's not going to make it into certainly an American democracy. It's going to be an evolutionary process. But what they're trying to do is to stabilize a country now of almost 1.3 billion people. As they build this economy so it will continue to support and broaden the standard of living of the people -- and I think there are many in the leadership that see this also as an instrument of liberalization of the political structure over a period of time.

SEN. BAUCUS: I wonder if very briefly Dr. Perle could just -- sorry, Mr. Chairman -- give a very brief answer.

MR. PERLE: Senator, I hope you'll let me say I think the --

SEN. BAUCUS: I'll let you say whatever you want to say. (Laughs.)

MR. PERLE: Saying that we're only talking about normal trade is, in a sense, true. But I think that's a little bit misleading. And the reason for that is when we talk about normal trade, we have in mind the interaction of private sectors where access to markets is determined by the ability to provide goods and services at the most effective price and to meet the demands of the market. In the Chinese case, so much of the economy is controlled centrally that even though one may have a nominal and legal entitlement to trade freely, in fact, the state can continue to restrict trade access in very important ways.

SEN. BAUCUS: That's true, but different countries are different. We're only talking here about MFN, most-favored-nation trading status. That's all we're talking about here.

MR. PERLE: No, I understand.

SEN. BAUCUS: Right. It's the same that we're giving to all countries, virtually all countries.

MR. PERLE: Right. But when we extend that status to a market economy, we can be reasonably confident that openness is going to be the result. It probably exists anyway. In the Chinese case, I think it's a mistake to believe that most-favored-nation status will, in itself, open that economy. The decision to open that economy is going to be made by the people who manage that economy, which is why I put the emphasis on the private sector.

The mechanism that you're after here -- and I believe in this -- if people are not dependent on the state, they will behave in a way that exerts the human desire for freedom and liberty. And so, to the degree to which there is a private sector and the state does not determine whether you can put food on the table, it's going to lead ultimately to a deterioration of communist rule.

SEN. BAUCUS: But the question is, all things being equal, does it help reform or not?

MR. PERLE: All things being equal, the growth of the private sector in China helps reform.

SEN. BAUCUS: Thank you.

SEN. ROTH: Senator Hatch.

SEN. ORRIN HATCH (R-UT): Thank you, Mr. Chairman. I'm happy to see all of you again. I welcome you to the committee. Let me just follow on with that, Mr. Perle. You know, it's estimated, more or less, China has 40 ICBMs and moving to 200 within the next 10 years. They've got MIRV (busing/faring ?) failure analysis technology for missile design and testing. They have highly classified anti- submarine warfare techniques, night-vision technology, machine tools that are necessary for military production that they could not have had otherwise during the last two years.

Many believe they have plans for basically every nuclear warhead in our arsenal. They also have high-capacity computers with 10,000 millions of theoretical operations per second going to 20,000 MTOPs per second. A lot of people are concerned about this, because if they go to the 20,000 MTOPs per second, to combine the military and the civil, as explained by this administration, peace and war, they'll be able to give a lot of priority to military products, it seems to me, and military matters. And, of course, the civilian side will certainly be supporting the military. This is something that's really concerning a lot of people in this country. Have I stated it fairly accurately?

MR. PERLE: Well, you've certainly identified some very troubling growth in the modern weaponry of China. And I think you're right to identify the issue. The question of the controls on computing power is a technical question on which I have a view. And whether you'd want to get into that, I'm not sure. I think we are less effective when we attempt to control raw computing power, because it is now so widely available.

But there is a great deal that we could do, and it won't be perfect, to try to control the extent to which the Chinese are developing a powerful military capability, including nuclear weapons, utilizing our technology, and even our designs in some cases. And we have been remiss in not taking serious steps to deal with that problem. And whether you can fashion a policy in the context of the vote that's before you, I don't know. But this administration will leave office without having exerted any adult supervision over the flow of militarily sensitive technology to China.

SEN. HATCH: Anybody else care to comment about it?

MR. LILLEY: I would, Senator.

SEN. HATCH: Sure.

MR. LILLEY: I bring to your attention two little books here. One is called "(Tao Ching ?), the Way of Peace" and one is Sun-tzu's "The Art of War." They agree on one thing: To win without fighting is the best way, says Sun-tzu, but he says a lot of other things too. To be open and to win over the other side is the best way. That's the old Lao-tzu, peaceful solution. I think the Chinese ought to pay a little more attention to their own philosophers about how to handle things. That's rather patronizing, but I think it's true.

Let me make a comment on the budget. First of all, I think it's foolish for people to run around and say China is a huge threat. I don't think that's right. I think it's foolish. I think it's even more foolish --

SEN. HATCH: Certainly foolish now.

MR. LILLEY: It's more foolish --

SEN. HATCH: What the question portended is that 10 years from now, maybe --

MR. LILLEY: Yeah, but I'm getting to that point, sir.

SEN. HATCH: Okay.

MR. LILLEY: It's more foolish to look the other way in terms of what we know what they're doing.

SEN. HATCH: Right.

MR. LILLEY: And I talked to four sensible scholars that have worked this problem very carefully. Mike Pillsbury (sp) has looked at their theory and their practice of warfare and their target, and it is us. Number two, Mark Stokes (sp) has written very thoughtful pieces on the way they institutionalize this thinking into their money, into their priorities, into their budgets, into their science, the systems they work on, the particular weapon systems. And it's all asymmetrical warfare aimed at our weaknesses, namely that we won't take losses and we are vulnerable in our carriers, our stealth and our satellite launching.

I think, finally, the real problems we have right now with China, as delineated by people in the Pentagon, as I understand it, are two things. One is missiles and the other one is submarines. And I'm not saying there aren't specific weapon systems to deal with these things, but these are the real threats really to our friends and allies in the area over the next, let's say, 10 years. I don't think they're overwhelming. I think we can manage them.

But it takes a lot of very careful strategic thinking to deal, for instance, with the submarines and with the missiles. And whether it's theater missile defense or massive retaliation in one case or whether it's sensors, data links and strike force or other submarines, this has to be worked out by thoughtful people. But we have to focus right on what their capabilities are and their intentions are and get our own act in order to deal with them.

SEN. HATCH: Mr. Chairman, if I could just finish one last thought on that. We're currently at 3.2 percent GDP for our military, going to 3.1 and then down to 2.9. How are we going to do that?

MR. LILLEY: You mean, our budget going down?

SEN. HATCH: Right, with our budget going down and the stresses and pressures.

MR. LILLEY: The percentage --

SEN. HATCH: The percentage of GDP.

MR. LILLEY: Yeah. Well, I can't say about our budget. I watch their budget. And I agree with Ambassador Sasser that the numbers they give you are phony. Everybody knows that. The question is, how large is the budget? It runs as high as $90 billion by some, $40 billion by others. Whatever it is, it's a real commitment to strategic weaponry. And the real -- the two biggest intelligence gaps we have is what they're getting from Russia and the nature of their exchanges with Taiwan. Those two intelligence gaps we have.

What we see they're getting from Russia and what we hear is the modernization of their entire submarine force, going from Kilo class possibly to Akula class nuclear power. And that really makes our Navy think. The other thing they're getting the SLCMs, the submarine- launched cruise missiles, and the air-launched cruise missiles, very effective missiles that could be used. We know this is happening. We don't know the extent of it.

I think on the missile side, as pointed out, they are building it up, SRBMs. They're building up their force opposite Taiwan significantly. I think one of -- Admiral Blair said, "It's the first time I've ever gone into a meeting with an interlocutor who says, 'The deployment of our missiles is our sovereign right and the deployment of your missiles is our sovereign right.'" So, I mean, it's a little hard to get a dialogue going under these conditions. But my own sense is you can talk strategy with the Chinese on military matters because we hold a lot of very, very good cards.

MR. SASSER: Senator Hatch, if I could just comment on this for a moment. One, I think there is a tendency in this country in some quarters to enormously overestimate Chinese military capability. I don't think that you can spend much time around China or in China and watch -- just what's on the surface you can see that military and come away from it with the sense that they are in any way a threat to the United States.

In quoting a very distinguished scholar, Michael Mendelbaum, who was commenting on the Chinese and the Chinese capability, and he was asked about the Chinese ability to dominate Asia. And his answer was: it lacks the power, the ideology and the will. And I think that is perfectly clear.

I mean, we talk about this Chinese weaponry. To my knowledge, they have something -- and this has been in the newspapers so I think we can talk about it -- they have something like 15 ICBMs, liquid fuels. It takes maybe 24 hours to fuel these things up. They're targeted not just at us, but at others.

And my sense is that the Chinese are more afraid of the Japanese and they're more worried about the Russians and they're more worried about the Indians than they are the United States. And with regard to their ability to generate all this so-called high-tech weaponry, they've been trying to build a jet fighter for the past 15 years that would be a match for our first-generation F-16 and they haven't gotten that thing moving yet.

So they've moved in the direction now of buying Soviet fighters and they've bought I think 60 to 90 of 'em. That doesn't sound to me as if that's a very significant threat. And they're having enormous difficulty maintaining them. They can't keep the engines running on them, because they don't have the maintenance capability.

They bought two Russian submarines. Both of them, the last time I heard, were not operating, because they did not have the capability or th maintenance capability -- to maintain the generators on them.

I mean, this is not a threatening military. It's been characterized by some of our experts in the Pentagon as the world's largest collection of military antiques. It's large, it is defensive in nature and it's largely still bogged down in the technology of the '50s and the '60s. They've got an enormous way to go. Their inventory of modern weaponry today is less than the Netherlands, to give you some frame of reference.

SEN. ROTH: Well, I want to thank the panel for the excellence of their testimony. This is probably the most critical vote that we'll face this year and --

SEN. MOYNIHAN: This decade, Mr. Chairman.

SEN. ROTH: This decade, absolutely. And so your insights and information is extremely helpful. And we urge you to keep in contact with us as we move forward on the legislation. Thank you very much for being here.

(End panel I; panel II will be sent under a different heading.)

END

LOAD-DATE: March 24, 2000

Document 236 of 374.


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