[Senate Hearing 108-609]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-609

                         U.S.-CHINA RELATIONS:
                       STATUS OF REFORMS IN CHINA

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

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON EAST ASIAN
                          AND PACIFIC AFFAIRS

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 22, 2004

                               __________

       Printed for the use of the Committee on Foreign Relations


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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

Bottelier, Pieter, Johns Hopkins University (SAIS)...............    43
    Prepared statement...........................................    45

Brownback, Hon. Sam, U.S. Senator from Kansas, opening statement.     1

Craner, Lorne W., Assistant Secretary of State for Democracy, 
  Human Rights and Labor.........................................     2
    Prepared statement...........................................     4

Lawless, Richard P., Deputy Under Secretary of Defense, 
  International Security Affairs-Asia Pacific....................     9

Lee, Thea M., chief international economist, American Federation 
  of Labor and Congress of Industrial Organizations (AFL-CIO)....    38
    Prepared statement...........................................    40

Robinson, Roger W., Jr., chairman, U.S.-China Economic and 
  Security Review Commission; accompanied by C. Richard D'Amato, 
  vice chairman, U.S.-China Economic and Security Review 
  Commission.....................................................    17
    Prepared statement...........................................    20

Waldron, Arthur, Lauder Professor of International Relations, 
  Department of History, University of Pennsylvania..............    30
    Prepared statement...........................................    33


                                Appendix

Responses to questions for the record submitted to Assistant 
  Secretary Lorne W. Craner by Senator Russell Feingold..........    55

Prepared statement of Senator Russell D. Feingold................    57

                                 (iii)

  

 
                         U.S.-CHINA RELATIONS:
                       STATUS OF REFORMS IN CHINA

                              ----------                              


                        Thursday, April 22, 2004

                               U.S. Senate,
    Subcommittee on East Asian and Pacific Affairs,
                            Committee on Foreign Relations,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:25 p.m. in Room 
SD-106, Dirksen Senate Office Building, Hon. Sam Brownback 
presiding.
    Present: Senator Brownback.

            OPENING STATEMENT OF HON. SAM BROWNBACK,
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. I will call to order this hearing on 
China.
    Since the passage of the bill granting Permanent Normal 
Trade Relations (PNTR), in 2000, and China's accession to the 
World Trade Organization, the WTO, in 2001, a key issue has 
been whether or not China has made any meaningful progress in 
the kind of reforms that are expected of a country like China. 
Increasingly, China is becoming an aggressive and important 
player in such areas as trade, geopolitical issues in Asia, and 
the global war on terrorism. At the same time, internal social 
stability in the PRC has become more problematic, including 
greater labor unrest, growing misallocation of resources tied 
to managed industrial policies, and more assertive public 
dissatisfaction and discontent with official corruption and 
lack of basic freedoms. For this reason China's current 
policies, whether in trade and economics, human rights, or 
geopolitical ambitions, demand close scrutiny because they 
impact both U.S. national security policy and U.S. jobs.
    Yesterday the United States and China held high level talks 
on trade, a critical issue with high stakes for American 
business and consumers alike. So, coming from a heavily 
agricultural state, I'm aware of how important trade is to our 
economy, especially trade with China. It's one of the world's 
fastest growing economies; China has a growing market for U.S. 
exports, including from my own state of Kansas. China is an 
important provider of imported products for U.S. manufacturers 
and consumers.
    I want to note for Mr. Craner and those here--if we could 
get order in the back of the room we'd appreciate that--this 
last week I was traveling in Kansas and talking with a number 
of individuals about what's taking place in China, and the 
issue of outsourcing, the issue of lack of labor rights, the 
issue of religious freedom, the issue of China, China, China 
continues to come up on a very regular basis. You just look at 
the statistics and you understand why China's total worldwide 
exports were about $438 billion in 2003. The percentage of that 
export which ended up in our market was about $163 billion, or 
37 percent, over a third of all their exports. By contrast, our 
exports from the U.S. were $714 billion, but our percentage 
going to China was four percent. It's no wonder our trade 
deficit with China will likely top $130 billion this year. It 
is a huge amount.
    At the hearing later on today we will have the chief 
economist for the AFL-CIO testifying about their Section 301 
case and the question of whether China is using labor in a 
trade disrupting, illegal fashion. We may want to, and I will 
try to express and we'll try to view the issue as well, of 
currency manipulation that's taking place in China and hear 
from other witnesses on that.
    I welcome our two witnesses here today to testify about the 
important relationship and what's taking place between the 
United States and China. Our first witness is the Assistant 
Secretary of Democracy, Human Rights and Labor at U.S. 
Department of State, Mr. Lorne Craner.
    Mr. Craner, before you begin I'd like to commend you for 
your efforts to pass a resolution condemning China's human 
rights practices and the U.N. Human Rights Commission. I think 
that sends an important signal, and it's a proper signal, that 
needs to be sent. That's not the easiest body to work within 
but your efforts have had a great impact and I appreciate that 
very much.
    Our next witness will be Mr. Richard Lawless. He's the 
Deputy Assistant Secretary for the Department of Defense. We 
will go to him after Mr. Craner.
    I want to welcome you to the committee, and I look forward 
to your testimony.

STATEMENT OF LORNE W. CRANER, ASSISTANT SECRETARY OF STATE FOR 
               DEMOCRACY, HUMAN RIGHTS AND LABOR

    Mr. Craner. Thank you Senator, very much, for holding this 
important hearing. It's an excellent time to take a look at our 
complex relations with the People's Republic of China and I'm 
pleased to be here to answer your questions about human rights 
conditions and the prospect for democracy there.
    As the committee took note when it convened this hearing, 
U.S.-China cooperation has improved steadily since early 2001. 
After September 11, the Chinese government became an ally in 
the global war on terror. It's been a key partner in 
discussions about North Korea. But even as we find common 
ground with China on these issues, we remain firm that there 
are areas on which we have different views, such as 
nonproliferation, and other areas such as Taiwan and Hong Kong 
that involve partly my areas of responsibility: freedom and 
human rights. We have not compromised when confronting China on 
and pursuing a resolution of these issues.
    June 4, less than two months from now, is the 15th 
anniversary of the crackdown at Tiananmen Square. This will be 
a somber anniversary. Fifteen years ago Americans and others 
around the world watched in horror as the PLA fired on peaceful 
students and workers who had captured the world's attention. 
Certainly everyone who watched those events hoped that 15 years 
hence China would be a very different place. But China's human 
rights record remains poor. In the 15 years since, the Chinese 
economy has continued to expand, and constraints on where one 
can live and what one can do for a living have been relaxed, 
but the freedom and rights that Tiananmen protestors asked for 
still have not been realized.
    In my tenure as Assistant Secretary of State for Democracy, 
Human Rights and Labor we documented some progress in China in 
2002, but we also documented backsliding on human rights in 
2003. This backsliding prompted President Bush, as you noted 
Senator, to authorize the State Department to pursue a 
resolution criticizing China's human rights practices at the 
Commission on Human Rights. As you also know, the Chinese 
government was successful in getting a sufficient number of 
members to vote in favor of a no-action motion, preventing the 
commission from engaging in a healthy debate about the human 
rights situation in China. But our work in Geneva is not in 
vain. In pursuing a resolution at the commission during a time 
of backsliding, we made a strong statement about our unwavering 
concern over the human rights situation in China. Most 
important, those who fight courageously every day to have their 
voices heard know that the United States will not forsake them. 
We have an obligation to speak out against the lack of freedom 
and for protection of human rights in China because we see the 
people of China doing it for themselves. And I believe we have 
a responsibility to support these efforts and to try to expand 
the political and legal space inside China.
    The State Department, and in particular my bureau, is 
currently administering $27.5 million in fiscal year 2002-2003 
in core funding to support democracy, human rights and the rule 
of law in China. At the end of the Clinton administration the 
State Department had begun to discuss the possibility of 
cooperating on legal reform projects in China. When President 
Bush came to office we decided to rethink that program and to 
craft a new approach to supporting freedom in China. Legal 
reform, while important, is too narrow a focus for a 
comprehensive China program. A U.S. program on China had to 
support liberty as well as law. Let me give you a few examples 
of the kind of things we're supporting.
    Over the last five years, China's village elections, in 
which non-Communists can run and win local office, have 
received much publicity. We're supporting work to expand the 
availability of those elections and have gone beyond that to 
support those who want to see elections expanded to higher 
levels.
    Legal reform in China is an area where we see meaningful 
change taking place. American NGOs continue to play an 
important role in catalyzing all kinds of legal development in 
China. The U.S. is supporting a wide array of efforts in this 
area, including programs that focus on drafting key pieces of 
legislation, a program to strengthen the use of evidence and 
witness testimony in trials, a program that works on helping 
villagers to challenge election fraud and abuse in the courts, 
and programs that hone the advocacy skills of criminal defense 
lawyers.
    As the legal system has developed, the Chinese people are 
becoming increasingly aware of their rights under the law, and 
we're also supporting them. American NGOs are working with 
Chinese sponsors to strengthen women's environmental and worker 
rights. Americans and Chinese are conducting awareness and 
public education campaigns so that average Chinese know whom to 
go to when they need legal assistance. We are also determining 
and monitoring compliance with international labor standards 
through such U.S.-sponsored activities as my bureau's 
partnership to eliminate sweatshops program, designed 
specifically to address unacceptable working conditions in 
manufacturing facilities producing for the U.S. market. And 
we're supporting the expansion of and encouraging new ways to 
think about the role of the media in China, as a provider of 
information and a watchdog.
    These rights and freedoms are occurring with increasing 
frequency: Elections with independent candidates, activists 
challenging the government, reporters courageously reporting 
the truth--even at the risk of losing their jobs or going to 
prison. Every day now we see such steps being taken by Chinese 
in China. These steps give us reason to be optimistic but the 
events that I described in the first half of my testimony also 
make us realistic. We cannot sit back and assume that because 
its economy is developing China is on an unwavering path to 
democracy. If anything, the Chinese leadership has given no 
indication that it might consider seriously the prospect of 
following the path of South Korea, the Philippines, or Taiwan 
in pursuing gradual reform toward full freedom of speech and 
association, judicial independence, and free and fair 
elections.
    With that in mind, we continue to monitor closely the 
situation in Hong Kong. We consistently urge Chinese and Hong 
Kong leaders to listen to the Hong Kong people and respond to 
their expressed aspirations for electoral reform and universal 
suffrage. After all, as Vice President Cheney pointed out in 
his remarks in China last week, China's actions in Hong Kong do 
not affect only Hong Kong. Many nations, the U.S. among them, 
have a significant investment in Hong Kong. The region's 
continued stability and prosperity is predicated on its 
continued rule of law and high degree of autonomy.
    In sum, I am optimistically realistic, or realistically 
optimistic, about the prospects for freedom in China. I agree 
strongly with the President, the Vice President, and Secretary 
Powell, all of whom have spoken often about the importance of 
individual freedom and respect for human rights. With regard to 
China, I believe our best policy is to speak out against human 
rights abuses, as we did this month in Geneva, and to encourage 
the reforms that are making significant inroads there.
    Mr. Chairman, I'm pleased to take your questions. Thank 
you.

    [The prepared statement of Mr. Craner follows:]

                 Prepared Statement of Lorne W. Craner

    I want to thank you, Senator Brownback, and the other members of 
the Senate Foreign Relations Committee for holding this important 
hearing. This is an excellent time to take a look at our complex 
relationship with the People's Republic of China and I am pleased to be 
here today to answer your questions about human rights conditions and 
the prospects for democracy in China. I am also glad to have this 
opportunity to share with you the Administration's assessment of these 
important issues and to tell you what we have been doing to confront 
the Chinese Government when it violates human rights in China and, as 
Vice President Cheney said last week, to support the aspirations of all 
Chinese people for freedom and democracy.
    As the committee took note when it convened this hearing, U.S.-
China cooperation has improved steadily since the first months after 
President Bush came to office and we confronted each other over the 
mid-air collision of Chinese and American planes near Hainan Island. 
After September 11, the Chinese Government became an ally in the Global 
War on Terror. It has been a key partner in discussions about North 
Korea. But even as we find common ground with China on these important 
issues of national security, we remain firm that there are areas on 
where our views differ, such as Hong Kong, Taiwan, proliferation, and 
my area of responsibility: freedom and human rights. We have not 
compromised when confronting China on and pursuing resolution of these 
issues. As recently as last week, Vice President Cheney stood firm in 
talking to China about these areas of disagreement and reminded his 
counterparts in Beijing that ``it would be a mistake for us to 
underestimate the extent of the differences'' between us.
    June 4--less that two months from now--is the 15th anniversary of 
the crackdown at Tiananmen Square. This will be a somber anniversary. 
It will be somber not just because of the hundreds, if not thousands, 
of lives lost in Beijing on the evening of June 3 and the morning of 
June 4. The June 4th anniversary is a somber one because there will be 
no public mourning in China for the lives lost there 15 years ago. The 
family members of the students and citizens who died in and around 
Tiananmen Square will not be able to gather there together to grieve 
their loss. There will be no candles lit, no memorial wreathes laid, no 
touching eulogies spoken. These mourners will receive no condolences 
from their government. The Chinese nation will not be able to come 
together in any public way to commemorate the lives that were lost on 
June 4. Even to discuss such a thing, as we have seen recently in the 
last few weeks, is to risk detention and imprisonment.
    Fifteen years ago, Americans and others around the world watched in 
collective horror as the People's Liberation Army fired on the peaceful 
students and workers who had captured the world's attention for six 
weeks. Certainly, everyone who watched those events unfold hoped that 
15 years hence China would be a different place. We hoped that China, 
15 years after Tiananmen, might be a country that was free and open, a 
country where human rights are respected, a country where different 
points of view could be shared without any fear of reprisal, and a 
country where religious adherents of all faiths could pray openly in 
whatever temple, church or mosque they chose. Of course, China today is 
not such a country.
    China's human rights record remains poor. In the 15 years since 
1989, the Chinese economy has continued to expand, and constraints on 
things like where one can live and what one can do for a living have 
been relaxed. But the freedoms and rights that the Tiananmen protestors 
asked for have still not been realized.
    In fact, in my tenure as Assistant Secretary of State for 
Democracy, Human Rights and Labor, my office has documented some 
progress in 2002, but backsliding on human rights in 2003. The Chinese 
Government's mistreatment of its citizens is manifest. Most recently, 
we have noted increased surveillance of the Internet and detention of 
those who express opinions about democracy. Democracy activists and 
some spiritual or religious adherents, including Tibetan Buddists, 
Uighur Muslims, Falun Gong practitioners, underground Protestants, and 
Catholics loyal to the Vatican, continue to suffer harsh treatment. We 
have received reports of religious adherents being mistreated or beaten 
in prison. We have regularly raised the need for prison reform, the 
right of children to receive religious training, and our extreme 
disappointment over egregious abuses against religious groups. Mr. 
Chairman, this administration has repeatedly--and at the highest 
levels--expressed strong concern, publicly and privately, over the 
detention of persons for the peaceful expression of their faith or 
political views and over restrictions on religious freedom, and we will 
continue to do so. We also continue to raise individual cases of 
concern such as Uighur businesswoman Rebiya Kadeer, labor activists Yao 
Fuxin and Xiao Yunliang and Tibetan monk Jigme Gyatso.
    These concerns were deepened by the Chinese Government's failure to 
carry out commitments made to U.S. officials during the December 2002 
Human Rights Dialogue to work with the UN Special Rapporteurs on 
torture and Religious Intolerance, the Working Group on Arbitrary 
Detention, and the U.S. Commission on International Religious Freedom.
    This backsliding prompted President Bush to authorize the State 
Department to pursue a resolution criticizing China's human rights 
practices at the meeting of the UN Human Rights Commission in Geneva 
this month. Our resolution was carefully considered. While 
acknowledging steps that China has taken that might result in improved 
respect for the rights of its people, we urged members of the 
commission to join us in expressing ``concern about continuing reports 
of severe restrictions of freedom of assembly, association, expression, 
conscience and religion, legal processes that continue to fall short of 
international norms of due process and transparency, and arrests and 
other severe sentences for those seeking to exercise their fundamental 
rights.''
    As the committee is aware, the Chinese Government was successful in 
getting a sufficient number of members to vote in favor of a ``no-
action'' motion, preventing the commission from engaging in a healthy 
debate about the sssshuman rights situation in China. But our work in 
Geneva was not in vain. The UN Special Rapporteur on Torture will 
indeed visit China at the end of June. And now the European Union is 
factoring China's human rights situation more prominently in its 
calculus of whether to lift its arms embargo against China. In pursuing 
a resolution at the commission, we made a strong statement about our 
unwavering concern over the human rights situation in China. Other 
countries and the Chinese Government itself have been compelled to take 
notice of our concern. And those who fight courageously every day to 
have their voices heard know that the United States has not forsaken 
and will not forsake them.
    We have an obligation to speak out against the lack of freedom and 
protection of human rights in China because we see the people of China 
doing this for themselves on a weekly basis. We see newspaper editors 
trying to push the boundaries for freedom of the press. We see 
democracy activists speaking out for constitutional protections and 
elections. We see lawyers who are fighting to make the legal system 
live up to its own laws. We see workers trying to come together to 
demand fair compensation. We see rural dwellers writing letters and 
gathering at government offices to demand that corrupt local officials 
step down. We see religious adherents risk their freedom to gather to 
pray in house churches. We see Tibetans who maintain their allegiance 
to the Dalai Lama and Catholics who maintains their allegiance to the 
Pope.
    In other words, we see individual, ordinary Chinese doing the 
extraordinary week after week, month after month. And I believe that we 
have the responsibility to support these extraordinary efforts and try 
to expand the political and legal space so that individual Chinese can 
keep pushing the boundaries.
    The State Department and, in particular my bureau, is currently 
administering $27.5 million to support democracy, human rights and the 
rule of law in China. At the end of the Clinton administration, the 
State Department began to discuss the possibility of cooperating on 
legal reform projects in China. When President Bush came to office, the 
State Department and my bureau decided to rethink that program, and we 
crafted a new approach to supporting freedom in China. Legal reform, 
while important, was too narrow a focus for a comprehensive China 
program. A U.S. program on China had to support liberty as well as law.
    Six years ago in 1998, when I was president of the International 
Republican Institute, I testified before the Asia and Pacific 
Subcommittee of the House International Relations Committee on the 
value of promoting democracy and the rule of law in China. At that 
time, the Congress was just considering democracy promotion as one 
policy option to address human rights concerns in China. In that 
testimony, I described to the committee the work that IRI had been 
doing since 1993 to promote electoral, legislative and legal reform in 
China. In five years of programming in China, IRI had seen rapid 
expansion of village elections in China and a strong commitment to 
developing sound, democratic procedures that allowed for open candidate 
selection and secret ballot voting. On the legal side, IRI had assisted 
the National People's Congress in developing more sophisticated 
legislative drafting capabilities and had worked with China's first 
legal aid service providers. I concluded:

          I hope I have shown that electoral, legislative and legal 
        reforms under way in China are meaningful and are accelerating, 
        and organizations such as IRI can help catalyze them. Yet in 
        the same period these reforms have taken place, so too have the 
        Tienanamen verdict, and all the legal reforms to date haven't 
        gotten those dissidents out of jail.
          I therefore come before you as an advocate, but not a zealot. 
        I am an advocate of broader American efforts to catalyze 
        Chinese reforms that are congruent with American values and 
        interests. At the same time, only a zealot would claim to know 
        how China will change. Democatic development in China may come 
        through the kind of incremental reforms I have described today. 
        It may also come more suddenly. Of one thing we can be certain: 
        Given the stakes involved, we would be wise to encourage every 
        possible source of change for China, including the potential 
        for change from within China.

    Six years later, I am proud to say that we are now encouraging 
``every possible source for change in China'' through the State 
Department's China Democracy program.
    The reforms that were under way in 1998 have definitely accelerated 
and expanded. In 1998, American NGOs were addressing a fairly narrow 
range of issues related to democracy and legal reform in China. 
Elections at the village level were developing and taking root in a 
meaningful way. Training on legislative drafting showed promise as a 
means of strengthening China's legislature so that could serve as a 
modest, but still effective check on central government power. Legal 
aid was just beginning in China. Today, these reform have significantly 
expanded and the State Department is supporting the organizations that 
continue to work on these issues. But we also support new organizations 
that are working to promote women's rights, labor rights, media reform 
and host of other issues that show how the channels for promoting 
reform in China have grown exponentially over the last few years.
    In the area of direct elections, for example, we are now no longer 
working to promote elections just at the village level. Since 1998, the 
pressure to expand elections to higher levels of government has 
increased significantly. In September 2003, a local official in Sichuan 
Province received international attention when he tried to organize a 
direct election for township magistrate despite a 2001 central 
government ban on such activities. Though his efforts were derailed, we 
believe that there are many other local officials who are willing to 
keep pushing the envelope to expand direct election in China, and we 
are able to support research and training that keep that mission alive.
    Like elections, legal reform in China is another area where we see 
meaningful change taking place. American NGOs and universities continue 
to play an important role in catalyzing all kinds of legal developments 
in China. The United States is supporting a wide array of efforts in 
this area, including programs that focus on the drafting of key pieces 
of legislation, such as new administrative litigation laws that enable 
Chinese to sue the government, a program to strengthen the use of 
evidence and witness testimony in trails, a program that works on 
helping villagers to challenge election fraud and abuse in the courts, 
and programs that hone the advocacy skills of criminal defense lawyers 
and that help them think about ways to protect themselves from becoming 
targets of the government if they handle sensitive, politically-charged 
criminal cases.
    As the legal system has developed, the Chinese people are becoming 
increasingly aware of their rights under the law, and the United States 
is supporting projects that increase this awareness. American NGOs are 
working with Chinese partners to strengthen women's rights in China, 
environmental rights and workers' rights. Americans and Chinese are 
working together to provide better legal services to abused women and 
workers who are injured on the job. They are working together to think 
about how to enforce China's environmental protection laws in some of 
the nation's and the world's most polluted cities.
    Americans and Chinese are conducting awareness and public education 
campaigns so that average Chinese citizens know whom to call when they 
need legal assistance. They are strategizing about how to use 
litigation and test cases to challenge the Chinese legal legal system 
to protect the rights that are on the books. And Americans and Chinese 
are determining and monitoring compliance with international labor 
standards, through such U.S.-sponsored activities as the Partnership to 
Eliminate Sweatshops Program, designed specifically to address 
unacceptable working conditions in manufacturing facilities that 
produce for the U.S. market. For example, one project in China is aimed 
at developing and testing an innovative model for worker-manager 
relations through which up to 3,000 workers will be trained in three to 
five factories in the toy and apparel industry; another focuses on 
working to promote labor rights awareness in the Chinese business 
community and Chinese business schools. I can't announce to you today a 
final decision to deny or accept the AFL-CIO's section 301 petition 
alleging that China's systemic failure to protect workers' human rights 
constitutes an ``unreasonable'' trade practice. But I can assure you 
that for our part, we are committed to continuing programs that 
actively support ongoing reform in China's labor relations system, 
improve labor conditions and protect worker rights, and strengthen the 
capacity of the Chinese Government to develop laws and regulations to 
implement internationally-recognized workers' rights and to promote 
greater awareness of labor law among Chinese workers and employers.
    As these rights awareness programs indicate, civil society is 
growing in China. And the United States is supporting its expansion and 
encouraging new ways of thinking about the role of the media as a 
provider of information and a watchdog. Media reform was something that 
no one contemplated when I spoke before the Congress in 1998 about 
democratic reform in China. Market competition is pushing the news 
media to none their investigative skills and report on stories about 
which the public wants to read. The Nanfang media group, which is based 
in media-savvy Guangzhou and publishes Southern Metropolis Daily and 
Southern Weekend (China's most popular news weekly), has developed a 
reputation as China's most progressive media group for its reporting on 
corruption, HIV/AIDS and, most recently, SARS. Two editors of the paper 
were recently tried on embezzlement charges. Many believe that these 
cases are the result of the paper's aggressive reporting on sensitive 
topics, and in an unprecedented move, a group of reporters and legal 
scholars have filed an online petition asking the Government for a 
retrial.
    This petition is one of several similar open documents that we have 
seen in recent months written by Chinese asking the Government to 
reconsider its policy on a particular issue. Last spring, three young 
Beijing law professors wrote a letter to the Government asking it to 
reconsider the use of ``custody and repatriation'' centers to hold 
people without residency permits, vagrants, and others. There followed 
the death of a young college graduate, Sun Zhigang, who was beaten by 
the police while being held in such a center. His death was widely 
reported by the media. The Government executed a staff member of the 
state facility and sentenced 17 others to long prison terms. At the 
same time, the Government also agreed to disband these centers, marking 
an important step for systemic reform of rights of the accused. 
Incidentally, one of the drafters of this letter, Xu Zhiyong, 
campaigned as an independent candidate for local People's Congress in 
Beijing's Haidian district. He won election in December.
    Other petitions have also circulated recently. This winter, Chinese 
scholars and activists circulated an online petition to seek the 
release of democracy activists who posted their thoughts on the 
Internet. Also this past winter, another group of well-known scholars 
wrote a letter to the Government asking it to clarify standards of 
freedom of expression and what constitutes subversion under Chinese 
law. The Government frequently uses subversion accusations to silence 
democracy and human rights activists. Finally, in March, Dr. Jiang 
Yanyong, whose name became public last spring when he contacted Western 
news media to report that Beijing authorities were covering up the SARS 
epidemic in China's capital, wrote a letter to the legislature asking 
members to consider a review of the Tiananmen verdict.
    These kinds of activities are taking place with increasingly 
frequency in China. Elections with independent candidates, activists 
who are challenging the Government to protect people's rights, 
reporters who are courageously reporting the truth, even at the risk of 
losing their job or going to prison--every day we are seeing these 
steps being taken in China.
    These steps give us reason to be optimistic at the prospect for 
democracy in China. But the events that I described in the first half 
of my testimony also remind us to be realistic. We cannot sit back and 
assume that China is on an unwavering path toward democracy. If 
anything, the Chinese leadership has given no indication that it might 
consider seriously the prospect of following the path of South Korea, 
the Philippines or Taiwan in pursuing gradual reform toward full 
freedom of speech and association, religious freedom, judicial 
independence, and free and fair elections. With that in mind, we 
continue to watch the situation in Hong Kong. We consistently urge 
Chinese and Hong Kong leaders to listen to the Hong Kong people and 
respond to their expressed aspirations for electoral reform and 
universal suffrage. After all, as the Vice President pointed out in his 
remarks in China last week, China's actions in Hong Kong do not affect 
only Hong Kong. Many nations, the U.S. among them, have a significant 
investment of people and resources in Hong Kong. The region's continued 
stability and prosperity is predicted on its continued rule of law and 
high degree of autonomy.
    In sum, I am optimistically realistic or realistically optimistic 
about the prospects for freedom in China. I agree strongly with the 
President, the Vice President, and Secretary Powell who have spoken 
often about the importance of individual freedom and respect for human 
rights for a strong polity and society. With regard to China, I believe 
our best policy is to speak out against human rights abuses, as we did 
this month in Geneva, and to encourage the reforms that are making such 
significant inroads there, as we are doing annually through the State 
Department's Democracy, Human Rights, and Rule of Law Program.
    Mr. Chairman, members of the committee, I'm pleased to take your 
questions now.

    Senator Brownback. Thank you very much, Mr. Craner.
    We'll go to our next witness first before doing questions.
    Mr. Richard Lawless is Deputy Assistant Secretary of the 
Department of Defense. And I appreciate very much you coming to 
the committee and we're happy to receive your testimony.

  STATEMENT OF RICHARD P. LAWLESS, DEPUTY UNDER SECRETARY OF 
      DEFENSE, INTERNATIONAL SECURITY AFFAIRS-ASIA PACIFIC

    Mr. Lawless. Thank you indeed, Senator Brownback. It is 
indeed a pleasure to appear at this hearing and have the 
opportunity to address the important issue of PRC military 
reforms.
    I have a prepared initial statement, largely drawn from our 
soon-to-be released Report to Congress on China's Military 
Power. I would then be glad to answer any questions you may 
have.
    China's People's Liberation Army, the PLA, has embarked on 
an ambitious, long-term military modernization effort to 
develop capabilities to fight and win short duration, high 
intensity conflicts along its periphery. China's defense 
modernization encompasses the transformation of virtually all 
aspects of its military establishment, to include weapons 
systems, operational doctrine, institution building and 
personnel reforms. In recent years the PLA has accelerated 
reform and modernization so as to have at its disposal a 
variety of credible military options to deter moves by Taiwan 
toward permanent separation or, if required, to compel by force 
the integration of Taiwan under mainland authority. A second 
set of objectives though, no less important, includes 
capabilities to deter, delay or disrupt third party 
intervention in a cross-Strait military conflict.
    The PLA has made progress in meeting these goals through 
acquiring and deploying new weapons systems, promulgating new 
doctrine for modern welfare, reforming institutions and 
improving training. The PLA's determined focus on preparing for 
conflict in the Taiwan Strait raises serious doubts over 
Beijing's declared policy of seeking peaceful reunification 
under the one country-two systems model. The growth of China's 
economy has allowed the PRC to sustain annual double-digit 
increases in its budget, with one exception, since 1990. The 
officially announced budget in 2004 is more than $25 billion. 
However, when off-budget funding for foreign weapons systems 
procurement in particular is included, we estimate total 
defense-related expenditures this year would be between $50 and 
$70 billion, ranking China third in defense spending after the 
United States and Russia.
    China's military reform has also benefited from observing 
U.S. operations; that is, combat operations. The PLA first 
observed the revolution in military affairs from the 1991 
Operation Desert Storm and studied how a technologically 
inferior force could defend itself against a superior opponent 
during Operation Allied Force over Kosovo. The PLA has likewise 
studied operations Enduring Freedom and Iraqi Freedom. The PLA, 
we believe, likely learned lessons on the application of 
unmanned aerial vehicles for reconnaissance and strike 
operations, the role of modern, well-trained special forces in 
precision targeting and the importance of speed in modern 
warfare. There are several key areas of reform within the PLA 
which I'd like to emphasize today.
    Joint Operations: PLA theorists and planners believe that 
future campaigns will be conducted simultaneously on land, at 
sea and in the air, space and electronic sphere. Therefore, the 
PLA is improving its joint operations capabilities by 
developing an integrated C\4\ISR network, a new command 
structure and a joint logistics system.
    Air Operations: The PLA Air Force is transitioning from a 
defensive force to one with a modern offensive strike 
capability. China's forced modernization plan and acquisition 
strategy for its air forces have been aimed mainly at defeating 
regional air forces, defending against aircraft operating at 
long ranges from China's coast, denying U.S. Naval operations 
and striking regional targets such as air bases and air defense 
sites.
    Missile Operations: In the area of conventional missile 
operations, Beijing's growing conventional missile force 
provides a strategic capability without the political and 
practical constraints associated with nuclear-armed missiles. 
The PLA's short-range ballistic missile, SRBM, force provides a 
survivable and effective conventional strike force and 
represents a real-time coercive option in the hands of the PRC 
military.
    China continues to improve quantitatively and qualitatively 
the capabilities of its conventionally armed SRBM force. The 
deployed inventory number is between 500 and 550 SRBMs, all 
deployed opposite Taiwan. And this deployment is increasing at 
the rate of 75 missiles per year. The accuracy and lethality of 
this force also are expected to increase through the use of 
satellite-aided guidance systems.
    Naval Operations: In the area of naval operations, Beijing 
realizes it must have forces available to respond rapidly to a 
range of regional contingencies, and it is seeking to build a 
balanced naval force for surface, anti-submarine, submarine, 
air defense, mine and amphibious warfare.
    In the area of C\4\ISR, China requires a survivable, 
robust, reliable and sophisticated Command, Control, 
Communications, Computer, Intelligence, Surveillance and 
Reconnaissance, that is C\4\ISR, system. This will allow it to 
collect, collate, integrate, manage and share access across a 
network of all battle space information. The PLA is continuing 
to upgrade its communication capabilities, which will rival the 
most modern civil networks.
    In the area of space, acquiring modern ISR systems remains 
critical to Beijing's military modernization program. And it 
supports the PLA's local war doctrine. Ongoing space-based 
systems, with potential military applications include two new 
remote sensing satellites, advanced imagery, reconnaissance and 
earth resource systems with military applications, as well as 
electronic intelligence, ELINT, or signals intelligence, 
SIGINT, reconnaissance satellites. China is conducting 
extensive studies and is seeking foreign assistance on small 
satellites and micro satellites weighing less than 100 
kilograms, for missions that include remote sensing and 
networks of electro-optical and radar satellites.
    In the area of counterspace developments, China is expected 
to continue to enhance its satellite tracking and 
identification network. According to press accounts, China can 
use probably low-energy lasers to blind sensors on low Earth-
orbiting satellites, although whether this claim extends to 
actual facilities at this point is unclear. China has 
reportedly begun testing an anti-satellite, that is an ASAT, 
system.
    China's defense industrial base deserves special mention, I 
believe. And I would like to conclude with some remarks about 
that industry. China's defense industrial base, also known as 
the National Defense Science, Technology and Industry, is a 
redundant structure consisting of factories, institutes and 
academies subordinate to the organizations that represent the 
nuclear, aeronautics, electronics, ordnance, shipbuilding and 
astronautics industries. The production factors are 
represented, for export/import practices, by trading 
corporations, with well-known names such as China Aerospace 
Technology Import/Export Corporation (CATIC) and China North 
Industries Corporation (NORINCO).
    The export/import corporations are entities which 
aggressively pursue contracts to sell PRC equipment overseas as 
well as involve foreign companies in joint ventures in China. 
The corporations are closely monitored by the State Department 
for proliferation concerns. For example, CATIC was recently 
sanctioned pursuant to the Iran Nonproliferation Act.
    Mr. Chairman, this concludes my initial testimony, and I 
would be glad to answer any questions you may have.
    Senator Brownback. Thank you very much, Mr. Lawless. I'll 
have questions for both you gentlemen.
    We have a vote that's on right now, and I've got about four 
minutes left in the vote. With your permission I'd like to put 
us in recess while I run over and vote and then come back, if 
you'd be willing to stay around for that period of time to 
answer some questions. I would appreciate that.
    This committee will be in recess for probably about ten to 
15 minutes and I'll be right back.

    [Whereupon, at 2:42 p.m. the hearing was recessed.]

    [RECESS]

    [The hearing resumed at 2:55 p.m.]

    Senator Brownback. Gentlemen, thank you very much. Sorry 
for the inconvenience.
    Mr. Craner, let me start with you if I could. In the next 
panel we'll have one of the chief economists for the AFL-CIO 
who's filed a Section 301 case based on labor practices in 
China and saying that those are an illegal trade advantage that 
is being expressed or used by China. The administration will 
have to make a decision whether or not to take this 301 case. 
Have you, can you articulate a position or where you are in the 
appraisal process of whether you will be making any 
recommendations regarding this 301 case?
    Mr. Craner. We're working with other agencies to come up 
with a recommendation. As you know, the office of the United 
States Trade Representative (USTR) has to announce a decision 
by April 30, and so the right response is under discussion 
between the State Department and other agencies. Clearly the 
petition itself refers numerous times to the human rights 
report that we put out. That report outlines that genuine 
freedom of association and collective bargaining do not exist. 
We all know that most workplaces have substandard conditions 
and a high rate of accidents, and that wages, hours and safety 
laws and regulations are generally not enforced.
    Senator Brownback. When I first saw that suit was filed I 
looked at it, and I thought about it, and then I read about it 
again, and then I read about it again, and the more I read 
about it, it seemed as if a number of things that were being 
alleged were items that I'd been pushing on issues of human 
rights, on issues of a lack of any sort of democracy in the 
workplace, of any sort of rights in the workplace, and I 
thought that while this was a different angle than I would have 
taken at it, it seemed to me to be a very interesting angle, 
one that hit at much of the same issues that I've been running 
in against China for some period of time. I've been saying that 
China's economic system is rampant capitalism without a 
legitimate means for workers to be able to express themselves 
in a system without balance, without morality. So I was looking 
at that and that's why I was pleased to see that we'll have 
that on the next panel. I know the administration has to make a 
decision sometime soon; it will be a tough decision to make.
    In addition, the currency case that the administration is 
bringing against China seems to me to be a clearer, perhaps 
easier, case to make. China's manipulating its currency, and by 
that impacting the global marketplace, impacting us, but more--
it may have more of an impact on other countries that sell into 
this market (Mexico and Central American for example) than it 
does directly here. Because by the Chinese underpricing or 
devaluing their currency, a baseball cap that comes in here 
relative to Mexico appears to be cheaper. But that's not the 
issue that would be assessed by your agency or department. I 
would hope you could spend a great deal of time giving a lot of 
thought about how bringing this 301 case forward could have 
positive impacts in the field that you're concerned about, and 
have done a very good job.
    Mr. Craner. I can assure you myself and my staff and others 
at the State Department have been spending a great deal of time 
on this, including Secretary Powell. There's not a lot in the 
petition that I don't find factually accurate. I have a 
difference with one of the categories that they address, but as 
I said, a lot of it has been drawn from documents that we 
ourselves have put together. I think the issue is whether it 
meets the 301 test and what remedies could be applied through 
that process. We have been trying up to now, and we intended 
even before this came up, to try and intensify the kind of 
activities in China, both at the corporate level but also down 
at the factory level, to try and improve conditions in China. 
The Department of Labor has also been pursuing a pretty wide 
program. I met with Secretary Chao about it just a few weeks 
ago, especially in the area of mining safety, which clearly in 
China is way substandard from what you see in almost any other 
country in the world.
    Senator Brownback. Are there other routes or remedies--you 
brought cases in front of the U.N. Human Rights Commission, had 
difficulty there; are there other avenues or venues that we can 
pursue more aggressively, given the case we know that exists 
currently, against the Chinese? You mentioned that the 301 
would be a bit of a novel way of putting this forward. There's 
a set of remedies that are available there that is not 
available in other fields. Are there other fields we can 
pursue?
    Mr. Craner. Well, the areas I talked about in the last half 
of my testimony are essentially new. Those are things that we 
have been doing over the last two years and, though modest, at 
a total of $27.5 million over three years, I would argue 
they're already having a good effect in terms of getting people 
in China to think a little more broadly. We encourage people in 
China to think a little more broadly about what kind of society 
they should live in, about their access to information, about 
whether or not they should be able to organize, at least at the 
factory level, about what their government ought to be doing 
for them, and ultimately about the possibilities of electing 
their own government. Those are all new questions that people 
in China are starting to ask, and they are very good questions 
to be asking. As a result of our doing the resolution, the 
Chinese threatened to, and did indeed, cut off our human rights 
dialogue, which was a formal, almost annual exercise that we 
had been through. I made clear to them that if we were going to 
have a dialogue it had to be based on results. In part because 
of the fact that we had not been seeing results from that 
dialogue, we hadn't had one in over a year. The President and 
the National Security Advisor, Secretary of State Colin Powell, 
Under Secretary Paula Dobriansky, and other officials in this 
government not traditionally concerned with human rights, they 
push these particular issues whenever they meet with the 
Chinese. And I think over time we're beginning to have an 
effect, partly because I think the Chinese are starting to 
understand that at least in a public way they need to be 
starting to get interested in these issues.
    What do I mean by that? I mean that China, as you've heard, 
wants to be a great power. And in today's world you cannot be a 
great power without having an open society. It was fine 20 or 
30 years ago to not have an open society and to try to be a 
great power. The Soviet Union managed to do it. But to be 
accepted as part of the club in today's world you cannot do 
that and be repressive with your people. And I think they are 
beginning to understand that.
    Senator Brownback. One final thought on this and then I 
would like to go to you, Mr. Lawless, if I could, is that, if 
China sets and gets away with a low bar on how it treats its 
own people in labor situations, in human rights situations--now 
particularly I'm thinking in labor situations now--it drives 
the rest of the world's bar down, and it has an impact on 
workers in Honduras, it has an impact on workers all over the 
world that are impacted having to compete with labor that's put 
in very difficult situations in China. So the degree that we 
can press on the Chinese aggressively here, and try to get more 
rights and more opportunities for them, I think it will have, I 
know it will have, a global impact. To the degree that we're 
not successful will have a global impact as well.
    Mr. Craner. I think you're right, and that's part of the 
reason we press it, especially as we get closer to 2005 and the 
end of quotas in places like a Bangladesh or a Guatemala or a 
Haiti that have been able to export goods into the U.S. under 
their quota.
    When I talk to corporations that operate in Guatemala or 
Bangladesh or Honduras, and I say where are you going in 2005, 
they all say China because that's where the cheap labor is 
going to be. But I would tell you one other thing that a lot of 
these corporations tell me, which is a little counter-
intuitive, which is that they're looking for countries--
remember, a lot of these corporations have been through 
scandals over the last five or ten years about the kind of 
places their clothing or sneakers or whatever are 
manufactured--and what they tell me is they're actually 
starting to look for places that want to make an issue out of 
better conditions for workers. Granted, these are name brand 
firms like Patagonia or Reebok. But they're actually looking 
for countries where the government is making an effort to jack 
the standards up because they don't want to get caught in a 
scandal two or three years from now about a rotten factory that 
they're making their goods in. That's a good thing, that these 
high end manufacturers are doing it. They are beginning to drag 
along some of the lower end manufacturers. But, a lot of no-
name manufacturers, that doesn't really matter to them because 
it's not going to hurt their brand name. So, we can encourage 
better conditions in the factories, and we've also got to 
encourage corporations to understand that better factory 
conditions are good of their own name, because they don't want 
to go through the kind of boycotts that some of these firms 
have seen over the years because of the poor conditions in 
which they manufacture. Many of them are beginning to 
understand that.
    Senator Brownback. It's a good point.
    Mr. Lawless, you point to a defense industry in China, 
doubling, I think you said, annual double-digit growth, and 
it's defense spending on an annual basis, all but one year over 
the last ten, I believe was your number, up to $50 to $70 
billion in defense spending this year in China. Where are they 
going with all of this defense spending? And do you see it 
capping out any time soon?
    Mr. Lawless. I guess really that is really the 64-thousand-
dollar question, Mr. Chairman. I think that the credible 
breadth of the economic base that's being established there and 
the growth in GDP and its ability to develop and acquire and 
integrate advance technologies into this society and into this 
economy gives us great pause for a concern as to where they can 
take their industrial base for defense. So I don't know that we 
see a capping out. They have simply the potential to devote an 
increasingly greater amount of net resources to their defense 
spending. They've shown the ability to spend hard currency very 
aggressively when they want to acquire a given system or 
technology. I think the combination of their ability to spend 
hard currency in ever-increasing amounts, for example in their 
weapons shopping excursions, the Soviet Union and other sources 
of technology and weapons systems, coupled with the base that 
now exists, gives us great pause for concern in the future in 
what they're going to be able to do with that industrial base 
and that economic base.
    Senator Brownback. You were talking in your testimony about 
it being a regional offensive projection, no longer a defensive 
orientation, as I gather, but only a regional orientation. Do 
you believe that's where it stops? Is it a regional offensive 
projection or does it move on from that point? Or do we really 
even know?
    Mr. Lawless. I don't think we know the answer to that. We 
do see clearly that the intention is to very rapidly, in most 
cases more rapidly than we had originally projected, develop 
the ability to flesh out that regional capability and 
particularly the ability to project power offshore. The ability 
to evolve from an essentially defensive system that would wage 
a defensive war on one's own territory and the ability to 
project force out, even regionally, is a very big step that 
requires development of not only systems themselves but 
doctrine and, as I mentioned, ideals and concepts of jointness, 
ever increasing sophistication of the systems they bring to 
bear. So I think for the near-term, as we watch the development 
of this regional projection capability, that is in and of 
itself a pause for concern.
    Senator Brownback. If Chinese leadership does not change, 
if it remains held in the small Communist party over the 
foreseeable future, is China our most likely competitor 
militarily that we see growing in the world today, if it 
remains on the path that it's projecting today, with the 
doctrinal change, with the shift in investment, with the 
ability to integrate technology rapidly?
    Mr. Lawless. It certainly would be working from the most 
robust base in the world to do that. And so, I think the 
combination of where they've grown their military today and the 
economic and industrial base which they'll have to grow it out 
in the future suggests that they would indeed become the main 
competitor, both regionally and possibly globally.
    Senator Brownback. So let's put the question another way. 
In other words, is there anybody else who has the same set of 
factors out there that would concern you as part of the 
Department of Defense here?
    Mr. Lawless. Not really in terms of projecting into the 
future, no.
    Senator Brownback. They're it.
    Mr. Lawless. Pardon me?
    Senator Brownback. They're it.
    Mr. Lawless. Again, the combination of the growth of the 
economy, which is truly impressive, and the ability to 
integrate advanced technologies into that economy is something 
that we haven't seen perhaps in recent history. I'm not 
attempting to make a direct comparison to the former Soviet 
Union, but the fact remains that this is a very robust economy 
that is growing and establishing a very sophisticated 
industrial base. I'm not sure that the Soviet Union is working 
from the same basis at all. I think that's what gives folks 
most pause for concern.
    Senator Brownback. So that if they really wanted to turn it 
on and aggressively turn on, even more aggressively turn on 
this defense military--or this military industrial complex--
they could really move it rapidly?
    Mr. Lawless. I think it's a question of where they elect, 
where they decide to invest their resources. When you work from 
an economy of this size, with this growth rate, you perhaps 
don't need to invest as, say, a North Korea or another country 
would have to invest very high levels of GNP--GDP--to their 
defense budget. You can still grow your military at very strong 
rates over a period of ten or twenty years. So again, I concur 
with what you just said.
    Senator Brownback. I chair the Science, Space, Technology 
subcommittee and, you know, we're looking at adjustments in our 
space program. One of the things that we're going to hold a 
hearing on in the future is other competitors in the space 
field, and China's the one that really steps forward, and there 
are others but China is a key one. What are they looking to do, 
can you determine from a defense or military perspective in the 
space program--other than what you were saying about imagery 
targeting--are there other designs that you've been able to 
determine from a military aspect of their space program?
    Mr. Lawless. Well quite obviously they have a very 
aggressive manned space program. They've made no doubt about 
the fact that they intend to work and live in space. So I 
believe that the combination of the resources they're devoting 
right now, the fact that they're able to induce reasonably 
sophisticated technologies where they can't home grow them and 
the fact that they're devoting a lot of resources to 
development of space capabilities, suggests that they see space 
as an important area for security policy in the future.
    Senator Brownback. For me, this wouldn't be much of 
particular concern if it were a democracy, if it were an open 
society, you'd look at it and you'd go, great, here's a 
competitor and we will compete vigorously as well. It's when it 
comes from a leadership that's very narrow and self-selected 
and can move aggressively and--I don't want to say whimsically 
but cavalierly--easily, that's when, you know, as a policy 
maker I look at it and I just grow concerned. If it were a 
democratic society, if it were an open society, I'd say, fine, 
we'll compete. But this is what draws my greater concern.
    Mr. Lawless. I would say in this year's China Military 
Power Report, which is in the final stages of preparation, and 
in fact I think we'll be able to deliver that in an early June 
time frame this year, some larger relative portion is devoted 
to the area of space and military use of space. And we make 
some judgements in there as to where we think the Chinese plan 
to take their programs, their security programs in space. So 
we've anticipated that and have addressed that in this year's 
report.
    Senator Brownback. As almost a final question, it's one 
that I want to put in the record, a Business Week article, 
March 26, 2004, and this is regarding the pending government 
contract to build Marine One. It's a helicopter for the White 
House. And according to the article, one of the company's 
that's vying for this contract had, as one of its development 
partners, a Chinese company that helped design and assemble 
some tail parts for its fleet of helicopters. That's no 
problem. But the problem is that the development partner, the 
China National Aerotechnology Import and Export Corporation, 
was indicted by the U.S. Government in 1999 for illegally 
buying and transferring machine tools to the Chinese military. 
Now, this company is also barred by the State Department for 
two years from any U.S. Government contract for technology 
sales to Iran. I've got questions about that, but I wonder, 
could you comment about the possibility of this group getting a 
U.S. Government contract while it's working with this Chinese 
company, or is this article inaccurate? If you could clarify 
that I would appreciate it.
    Mr. Lawless. I'm quite familiar with the procurement 
itself. I'm not familiar with this aspect of it, and what I'd 
like to do is take this under advisement and come back to you 
with a more detailed response.
    Senator Brownback. I would appreciate it if you would do 
that because it caught my eye that this was sitting out there. 
And again, you'd look at it one, I don't like it period, but it 
also seems to come on the heel of several instances where we've 
had trouble with technology transfers getting to China. And, 
you know, we hope no scenario that's a military one ever 
develops, but you just hate to see this continued violation in 
technology transfer happening, particularly if we're involved 
in funding any of it; we don't want to see that. So if you 
could get back to me on that in more detail I would appreciate 
that.
    Mr. Lawless. I would do that, and if I could make one final 
comment on this, I do agree with you in that technology leakage 
and technology transfer becomes exponentially more dangerous to 
us in the Chinese context when you do have an industry, 
particularly a microtechnology industry and other aspects of 
this commercial industry which are growing apace and are able 
to induce and use this cream skimming technology, if you will. 
So it's a very important problem for us and I think it's one 
we're paying increasing attention to.
    Senator Brownback. Thank you.
    Gentlemen, thank you very much for joining me today. And I 
appreciate very much your insights.
    We have a second panel I'd like to call forward. Dr. Arthur 
Waldron, Lauder Professor of International Relations, 
University of Pennsylvania out of Philadelphia. Thea Lee, Chief 
International Economist for the AFL-CIO. Mr. Pieter Bottelier, 
Adjunct Professor of China Studies at Johns Hopkins. And Mr. 
Roger W. Robinson, Jr., Chairman, U.S.-China Economic and 
Security Review Commission out of Washington. He will be 
accompanied by Mr. C. Richard D'Amato, Vice Chairman, U.S.-
China Economic and Security Review Commission.
    I want to thank you all for joining us today. And I 
appreciate very much you staying in here while the hour's 
gotten late. Mr. Robinson, let's start off with you as Chairman 
of the U.S.-China Economic and Security Review Commission, if 
you wouldn't mind. We will put your complete statements in the 
record, so you can summarize if you would choose to, that would 
be just fine; then we'll have some questions afterwards.
    Mr. Robinson.

   STATEMENT OF ROGER W. ROBINSON, JR., CHAIRMAN, U.S.-CHINA 
  ECONOMIC AND SECURITY REVIEW COMMISSION; ACCOMPANIED BY C. 
    RICHARD D'AMATO, VICE CHAIRMAN, U.S.-CHINA ECONOMIC AND 
                   SECURITY REVIEW COMMISSION

    Mr. Robinson. Thank you very much, Mr. Chairman. We 
appreciate this opportunity to testify on the work of the 
commission and our assessment for the Congress of the priority 
areas in U.S.-China relations. I'm joined at the table by 
commission Vice Chairman Richard D'Amato, demonstrating the 
strongly bipartisan nature of our views and the work of the 
commission. I should also note at the outset that the views 
expressed in this testimony are those of the commission's 
Chairman and Vice Chairman and, except where specifically 
stated, do not necessarily reflect the views of other 
commissioners. The commission will be delivering its 2004 
report to Congress next month, which will present the full 
commission's consensus, findings, and recommendations in 
fulfillment of our legislative mandate.
    Today we want to highlight for the committee our 
preliminary assessment of the priority areas of concern in 
U.S.-China relations, those requiring the most immediate 
attention of the Congress, and reinforce some of the 
recommendations we've made to Congress on these topics over the 
past year. We see the priority areas as follows: (1) effective 
management of U.S.-China trade and investment; (2) the changing 
dynamics of the cross-Strait relationship; (3) holding China to 
its commitments on Hong Kong; and (4) China's pivotal role in 
the North Korean nuclear crisis.
    Before we address these specific areas, we would like to 
offer our summary assessment of the current direction of U.S.-
China relations, at least with regard to the broad areas 
covered by our mandate. In short, we believe that a number of 
the current trends in U.S.-China relations have potential 
negative implications for our long-term economic and national 
security interests, and therefore that U.S. policies in these 
areas are in need of urgent attention and course corrections. 
We believe that the time is ripe for putting the U.S.-China 
relationship on a more solid, sustainable footing from the 
perspective of long-term U.S. interests. The U.S.-China 
relationship is still in the relatively early stages of its 
development and is marked by a fluid, rather than a static, 
environment. The United States has played and continues to plan 
an enormous role in the economic and technological development 
of China. As we've documented through our hearings and reports, 
U.S. trade investment and technology flows have been the 
critical factor in China's rise as an economic power. We need 
to employ the substantial leverage this provides to develop an 
architecture that advances both country's long-term interests. 
We have leverage now, and perhaps for the next decade, but this 
may not always be the case. Within this framework, let me turn 
to a discussion of the key near-term areas of concern and our 
thinking on possible U.S. policy responses.
    I'd like to begin with effective management of U.S.-China 
trade and investment. First, our trade and investment 
relationship with China, with current trends continuing and the 
deficit expanding, is not just a trade issue for the United 
States but a matter of our long-term economic health and 
national security. Beyond these immediate challenges are the 
implications for globalization writ large. The commission 
believes that the U.S.-China economic relation is of such large 
dimension that the future trends of globalization will depend 
to a substantial degree on how we manage our economic relations 
with China and shape the rules of the road, if you will, for 
broader global trade relations. Our written testimony contains 
numerous specific recommendations the commission has made to 
the Congress on actions to right the imbalance in U.S.-China 
trade. We meet today during the same week that a high level 
trade dialogue took place in Washington between U.S. and 
Chinese officials. As we understand, the Chinese side made 
commitments to significantly improve their poor record of 
protecting intellectual property rights and not to move forward 
with a restrictive standard that would have been a barrier to 
U.S. wireless goods. Time will tell whether these commitments 
will be fulfilled. We've often seen China's trade promises, 
particularly on IPR, be worth no more than the paper they're 
written on. We also are concerned----
    Senator Brownback. Sir, I've got to jump in. I think this 
is the third or forth time around I've heard them commit to 
protecting intellectual property rights more. I was in Bush I 
of the trade rep's field; they promised then. I was here during 
the Clinton years; they promised then. They're promising now. 
You know what? At some point in time, you know, and that's what 
you're saying but this is personally, for me, seeing this song 
over a decade period of time and nothing has happened yet. 
Please proceed.
    Mr. Robinson. I don't disagree. We're also concerned that 
several vital issues in U.S.-China trade, including China's 
currency and subsidies policies were not on the table during 
these talks.
    Second, the changing dynamics of the cross-Strait 
relationship. The committee's well aware of the significant 
events in the Taiwan Strait over the past few months and the 
growing tensions between the two sides, particularly following 
President Chen's re-election last month. The state of cross-
Strait relations appears to be entering a new era, one that 
will require new thinking by the administration and the 
Congress. The Taiwan Relations Act has served U.S. interests 
well over its 25-year history, and we as a government and 
nation need to remain faithful to it, especially now when the 
cross-Strait situation is as complex as it's ever been. In sum, 
given the current economic and political trends in the Strait 
that we've identified in our written testimony, developments 
that call into question the status quo in cross-Strait 
relations, we believe there's an immediate need for Congress 
and the administration to review our policies toward Taiwan and 
cross-Strait relations, and to determine an appropriate role 
for the United States in reinvigorating the cross-Strait 
dialogue.
    Third, holding China to its commitments on Hong Kong. The 
recent events in Hong Kong point to troubling signs of an 
erosion of the autonomy promised Hong Kong by the mainland 
under the One Country, Two Systems formula. These events have 
no doubt played into developments in Taiwan, where such a 
formula for any eventual unification has become a non-starter. 
We know this committee is deeply concerned, as is the 
commission, about the maintenance of Hong Kong's basic 
freedoms. We urge the Congress and Administration to let the 
Chinese leadership know that Beijing's moves to limit Hong 
Kong's autonomy and democratic aspirations are not in any 
party's long-term interest, and that U.S.-China relations will 
be adversely affected by a continuation of Beijing's current 
course.
    And fourth, China's pivotal role in the North Korean 
nuclear crisis. In the post-9/11 world there can be no doubt 
that stemming the tide of the proliferation of weapons of mass 
destruction and ballistic missiles is the highest national 
priority for the United States. The commission's charge to 
examine China's role in WMD proliferation is part of this 
effort. North Korea is heavily dependent on Chinese assistance 
in the form of fuel, financial aid, military-to-military ties, 
and food. These facts clearly indicate that the considerable 
leverage Beijing could exert over Pyongyong is evident, if it 
chooses to use it. To date, however, China has been playing 
more of a host than intermediary role in the Six-Party Talks 
and does not appear to be pressing for its expeditious 
resolution. Time is not on our side in confronting this crisis. 
As the Six-Party Talks drag on, North Korea's nuclear weapons 
and ballistic missile programs keep moving apace. As these 
capabilities are attained, the prospects for achieving a 
complete, verifiable and irreversible dismantlement by North 
Korea are dimming substantially. In our view, the U.S. 
government must make clear to China that its efforts in this 
crisis are a key, if not the key, test of the U.S.-China 
relationship. China's efforts in getting the Six-Party Talks 
underway must be followed up by the active use of its 
substantial leverage. In the event of continued stalemate and 
lack of Chinese success in persuading North Korea to accept 
these requirements, we believe the United States must develop 
other policy options with our partners in the region to resolve 
this highly critical situation in the near-term.
    Mr. Chairman, we thank you for this opportunity to testify. 
Through an appropriate mix of U.S. policies we're optimistic 
that this complex relationship can be managed in such a way as 
to minimize the downside risks and enhance the prospects of 
moving China toward a more democratic and market-oriented 
society to the benefit of both of our economic and national 
security interests. Vice Chairman D'Amato and I will be pleased 
to take your questions. Thank you.

    [The joint statement of Mr. Robinson and Mr. D'Amato 
follows:]

Prepared Statement of Roger W. Robinson, Jr., Chairman; and C. Richard 
     D'Amato, Vice Chairman, U.S.-China Economic & Security Review 
                               Commission

    Mr. Chairman and members of the committee:
    Thank you for this opportunity to testify on the work of the 
commission and our assessment for the Congress of the priority areas in 
U.S.-China relations. We are submitting this as a joint statement by 
the Chairman and Vice Chairman of the commission, as an expression of 
the bipartisan nature of our views and the work of the commission.\1\
---------------------------------------------------------------------------
    \1\ The views expressed in this testimony are those of the 
commission's Chairman and Vice Chairman and, except where specifically 
stated, do not necessarily reflect the views of other commissioners.
---------------------------------------------------------------------------
    The commission was established in the Fall of 2000 to ``monitor, 
investigate, and report to Congress on the national security 
implications of the bilateral trade and economic relationship between 
the United States and the People's Republic of China (PRC).'' We were, 
to a large extent, a result of the decision by Congress earlier that 
year to grant Permanent Normal Trade Relations (PNTR) to China. The 
annual NTR debate in Congress had been the forum by which Congress took 
stock of year-to-year developments in U.S.-China relations, and 
ventilated concerns regarding areas where the relationship might be off 
track. With the approval of PNTR, the House and Senate properly 
recognized the importance of continuing Congress' annual assessment of 
key areas of U.S.-China relations, given the growing stature of this 
bilateral relationship.
    Following the commission's first Report to Congress in July 2002, 
Congress revised the commission's charter to focus our work on the 
following areas: China's proliferation practices, China's economic 
reforms and U.S. economic transfers to China, China's escalating energy 
needs, Chinese firms' listing or trading in the U.S. capital markets, 
U.S. investments into China, the regional economic and security impacts 
of China's growing economic, military, and political clout, U.S.-China 
bilateral programs on science and technology cooperation and agreements 
on intellectual property rights and prison labor imports, China's 
record of compliance with its World Trade Organization (WTO) 
commitments, and the Chinese Government's efforts to control the media 
and, through that, perceptions of the United States within China. This 
extensive mandate reflects the complexity of U.S.-China relations, and 
highlights the continuing need for the United States to carefully 
manage this relationship.
    The commission will deliver its 2004 report to Congress next month, 
which will present its findings and recommendations in the issue areas 
specified by Congress. We will also be answering the central theme of 
our mandate to provide Congress with an overall assessment of ``the 
national security implications of the bilateral trade and economic 
relationship.'' We hope this analysis will prove useful for the 
committee's and Congress's important deliberations on U.S.-China 
policy. We would be pleased to come back to the committee to present 
the full findings and recommendations of our report once it is 
complete.
    Today, we want to highlight for the committee our preliminary 
assessment of the priority areas of concern in U.S.-China relations--
those requiring the most immediate attention of the Congress--and 
reinforce some of the recommendations we have made to Congress on these 
topics over the past year.
    In sum, we see the priority areas as the following:

   Effective management of U.S.-China trade and investment

   The changing dynamics of the cross-Strait relationship

   Holding China to its commitments on Hong Kong

   China's pivotal role in the North Korean nuclear crisis

    Before we address our specific concerns and recommendations in 
these areas, we would like to offer our assessment of the current 
direction of U.S.-China relations, at least with regard to the broad 
areas covered by our mandate. In sum, we believe that a number of the 
current trends in U.S.-China relations have potential negative 
implications for our long-term economic and national security 
interests, and therefore that U.S. policies in these areas are in need 
of urgent attention and course corrections.
    This assessment is somewhat counter to much of the conventional 
wisdom in the United States today that characterizes U.S.-China 
relations as having reached a positive new echelon in light of the 
apparent cooperation between the two countries on anti-terrorism 
initiatives and, in particular, confronting the North Korea nuclear 
crisis. We recognize the importance of these developments and do not 
dismiss their significance. Rather, we believe that there are long-term 
trends in the relationship that give us cause for concern, but which 
can be corrected given timely and sustained U.S. attention and effort.
    In light of this assessment, we believe that the time is ripe for 
putting the U.S.-China relationship on a more solid, sustainable 
footing from the perspective of long-term U.S. interests. The U.S.-
China relationship is still in the relatively early stages of its 
development and is marked by a fluid rather than static environment. To 
use an analogy--the relationship is like a building where not only has 
the paint not dried in any room, but the architectural plans are still 
being revised. The United States has played--and continues to play--an 
enormous role in the economic and technological development of China. 
As we have documented through our hearings and reports, U.S. trade, 
investment, and technology flows have been the critical factor in 
China's rise as an economic power. We need to use the substantial 
leverage this provides us to develop an architecture that advances both 
countries' long-term interests. We have the leverage now and perhaps 
for the next decade, but this may not always be the case.
    When the Congress approved PNTR for China, the guiding premise was 
that it would expand market access for U.S. goods and services and, 
more fundamentally, would lead to economic reform in China and, 
eventually, political reform. In this context, it was characterized as 
in our ``national security interest'' to support China's accession to 
the WTO. Having taken this significant step, the United States cannot 
lose sight of these important assumptions, and we must configure our 
policies toward China to help make these assumptions materialize--from 
expanded trade opportunities for U.S. exporters and a mutually 
beneficial trade relationship that sets global standards for fair 
trade, to an open, more democratic society that can be an important 
partner in addressing global. security challenges, including weapons 
proliferation, terrorism, and, of course, a peaceful resolution of the 
cross-Strait situation.
    If we falter in the use of our economic and political influence now 
to effect positive change in China, we will have squandered an historic 
opportunity. We believe China demonstrated a willingness to move in a 
positive direction, and to take substantial risks to do so, when it 
entered the global economy. And there has been substantial market 
liberalization in China as well as new laws improving property rights 
for citizens. But China will likely not initiate the decisive measures 
toward more meaningful economic and political reform without 
substantial and sustained pressure from a United States willing to 
utilize its tools of leverage and persuasion.
    The Congress gave our commission an important and unique task--to 
identify the scope of problems and shortcomings in key areas of the 
U.S.-China relationship, and to make recommendations to Congress 
concerning how to address these concerns. In this pursuit, the 
commission can serve as an effective early warning mechanism to surface 
economic and national security concerns before they become 
unmanageable, and to recommend policy changes that can affect mid-
course corrections in U.S. policy where necessary.
    Within this framework, we will now turn to a more detailed 
discussion of the key areas of concern we see at the present time in 
U.S.-China relations, and our thinking on possible U.S. policy 
responses.

        EFFECTIVE MANAGEMENT OF U.S.-CHINA TRADE AND INVESTMENT

    Trade and investment flows constitute the core of U.S.-China 
economic relations. Bringing these flows into proper balance will 
significantly determine the benefits to the United States of this 
important relationship. The challenge facing U.S. policymakers operates 
at two levels. On one level there are the immediate problems associated 
with the enormous trade deficit that the United States has with China 
and the resulting consequences for the U.S. economy, particularly the 
manufacturing sector. This requires attention to the issues of exchange 
rates and currency manipulation, and addressing China's mercantilist 
trade and industrial policies through vigorous enforcement of WTO and 
U.S. trade laws.
    But beyond these immediate challenges are the implications 
associated with ``globalization.'' The commission believes that the 
U.S.-China economic relationship is of such large dimensions that the 
future trends of globalization will depend to a substantial degree on 
how we manage our economic relations with China. It is reasonable to 
believe that U.S.-China economic relations will shape ``the rules of 
the road'' for broader global trade relations. If current failings are 
remedied and the relationship is developed so as to provide broad-based 
benefits for both sides, globalization will likely be affected in a 
positive manner on a worldwide scale. If trade commitments and the rule 
of law are honored, and trade is conducted with respect for labor 
rights and environmental protection, the direction of globalization 
will probably take a turn for the better worldwide. If not, the 
opposite will likely eventuate.
    The dominant feature of U.S.-China economic relations is the U.S. 
goods trade deficit, which rose by more than 20 percent in 2003 to a 
record $124 billion. The deficit with China now constitutes 23 percent 
of the total U.S. goods trade deficit, and China is by far the largest 
country component of the deficit. Moreover, U.S. trade with China--with 
$28 billion in exports to China in 2003 as compared with $152 billion 
in imports--is by far the United States' most lopsided trade 
relationship as measured by the ratio of imports to exports. This trade 
deficit is of major concern because (i) it has contributed to the 
erosion of manufacturing jobs and the current jobless recovery in the 
United States, and (ii) manufacturing is critical for the nation's 
economic and national security.
    Therefore, our trade and investment relationship with China--with 
current trends continuing and the deficit expanding--is not just a 
trade issue for the United States, but a matter of our long-term 
economic health, and national security.
    A key factor contributing to the deficit is the undervaluation of 
the Chinese yuan against the U.S. dollar. This gives Chinese producers 
a competitive advantage by making Chinese imports relatively less 
expensive, and U.S. exports relatively more expensive. It also 
undermines the profitability of U.S. manufacturers, thereby reducing 
their investment spending while also giving them an incentive to shift 
production to China. Economic fundamentals suggest that the Chinese 
yuan is undervalued, with a growing consensus of economists estimating 
the level of undervaluation to be anywhere from 15 to 40 percent. 
However, China persistently intervenes in the foreign exchange market 
to maintain the de facto peg of 8.28 yuan per dollar.
    The 1988 Omnibus Trade and Competitiveness Act requires the 
Secretary of the Treasury to report to the Senate Banking Committee 
twice each year with an assessment of currency manipulation by trading 
partners. The commission is greatly concerned that the Treasury 
Department has repeatedly sidestepped a finding that China is 
manipulating its currency, despite the mounting evidence to the 
contrary.
    To address this, the commission has recommended to Congress that if 
the Treasury Department's efforts to effect an upward revaluation of 
China's currency prove ineffective, Congress should use its legislative 
powers to force action by the U.S. and Chinese Governments to address 
this unfair and mercantilist trade practice. For the near future, 
continued vigorous development of such legislative initiatives as were 
outlined by members of Congress during our hearing, linking China's 
performance on its exchange rate policies to its continued full access 
to the U.S. market, appears essential to ensure the appropriate level 
of effort by both governments to this matter.
    A second factor contributing to imbalances in U.S.-China trade are 
China's mercantilist industrial and foreign direct investment policies, 
the purpose of which appears to be to enhance the power of the Chinese 
state. China has pursued industrial policies that involve a wide range 
of measures including technology transfer requirements, government 
subsidies, discriminatory tax relief, and limitations on market access 
for foreign companies. The Chinese Government is currently targeting 
the high tech, auto, and auto parts industries. The textile sector is 
another industry of great concern as the ending of the multi-fiber 
agreement (MFA) on January 1, 2005 promises to spur a massive shift of 
textile production to China, which will likely decimate what remains of 
the U.S. textile industry (which still employs 630,000 people), as well 
as textile industries from Mexico to Bangladesh.
    To counter these practices, the commission has recommended to 
Congress that:

   The United States Trade Representative and Department of 
        Commerce immediately undertake a comprehensive investigation of 
        China's system of government subsidies for manufacturing, 
        including tax incentives, preferential access to credit and 
        capital, subsidized utilities, and investment conditions 
        requiring technology transfers. USTR and Commerce should 
        provide the results of this investigation in a report that lays 
        out specific steps the U.S. Government can take to address 
        these practices through U.S. trade laws, WTO rights, and by 
        utilizing special safeguards China agreed to as part of its WTO 
        accession commitments.

   The U.S. tax code be restructured to eliminate incentives 
        for U.S. business, particularly manufacturing, but also 
        services and high technology companies, to shift production, 
        services, research and technology off-shore.

   Congress amend U.S. countervailing duty laws to make them 
        applicable to nonmarket economies, such as China.

   The U.S. Government work with other interested WTO members 
        to convene an emergency session of the WTO to extend the Mult-
        fiber Arrangement at least through 2008.

    An essential part of our mandate--as well as U.S.-China trade 
relations--is to assess China's progress in meeting its commitments as 
a member of the WTO. China joined the WTO in December 2001. Its 
accession agreement is extremely complex, reflecting the need for 
special arrangements to address the fact that China joined the WTO 
without having met the requirements of a market economy. To protect 
against trade distortions and unfair trade practices resulting from 
China's non-market status, China's WTO agreement includes a special 
review mechanism to monitor China's compliance and special safeguard 
provisions giving WTO members the right to protect themselves against 
sudden surges of Chinese imports. It is critical that these agreements 
be properly and vigorously implemented and enforced.
    China has made progress in reducing tariffs and otherwise formally 
meeting a large number of its WTO accession commitments, but 
significant compliance shortfalls persist in a number of areas of key 
importance to U.S. trade. In particular, China continues to provide 
direct and indirect subsidies to Chinese producers, there is rampant 
abuse and lax enforcement of intellectual property rights, foreign 
firms face discriminatory tax treatment, there is poor transparency in 
the adoption and application of regulations, and China uses unjustified 
technical and safety standards to exclude foreign products.
    We are also particularly dismayed with China's level of cooperation 
with the WTO's Transitional Review Mechanism (TRM) for reviewing 
China's WTO progress. As part of its accession agreement, China agreed 
to be subject to this multilateral annual review of its compliance 
record for the first eight years of its WTO membership, with a final 
review after the tenth year. The TRM was an important provision of 
China's accession agreement--one that U.S. negotiators strenuously 
pressed for--because it was seen as a robust mechanism for both 
monitoring China's compliance progress and for applying multilateral 
pressure on China to correct deficiencies. Instead, however, China has 
undermined the TRM during its first two years by refusing to fully 
cooperate with and address WTO member questions and other efforts to 
engage China in a dialogue on compliance shortfalls. It has simply not 
served as the intended robust mechanism for combating China's 
compliance shortfalls.
    Therefore, the commission has recommended to Congress that USTR and 
other appropriate U.S. Government officials undertake strenuous efforts 
to reform the TRM process into a meaningful multilateral review and 
measurement of China's compliance with its WTO commitments. If this is 
unsuccessful, the U.S. Government should initiate a parallel process 
with the EU, Japan, and other major trading partners to produce a 
unified annual report by which to measure and record China's progress 
toward compliance, which report should be provided to Congress as part 
of USTR's annual report to Congress on this matter.
    Though aware of these failings and problems, the U.S. Government 
has not been sufficiently vigorous in enforcing U.S. trading rights 
under either U.S. law or through the WTO. This is exemplified by the 
administration's failure to use the China-specific safeguards available 
to WTO members that protect against market disruptions by Chinese 
imports. The International Trade Commission has conducted five Section 
421 safeguard investigations against Chinese products, and in three 
cases it found for the plaintiffs. Yet, in all three cases the 
President refused to take action. These developments risk undermining 
the Section 421 process, as companies may cease filing legitimate 
petitions if, given the significant legal costs, they come to believe 
the administration will not act. Moreover, the administration was slow 
in implementing procedures for U.S. use of the WTO China-specific 
textile safeguard, and first imposed the safeguard in December 2003 on 
a select few categories of textiles, despite the enormous detrimental 
impact of imports from China on the U.S. textile industry.
    Overall, we are troubled by what we see as a general hesitancy 
among WTO members with substantial trade relations with China to raise 
legitimate trade disputes with China for fear of economic retaliation. 
The United States finally broke the ice by bringing the first WTO trade 
dispute against China on its preferential value-added tax (VAT) 
treatment for domestically designed and produced semiconductors. We 
hope this will open the door to other WTO members exercising their 
rights under the WTO to address unfair Chinese trade practices. In 
fact, the United States should be actively coordinating with its major 
trading partners on areas of mutual concern regarding China's trade 
practices.
    In light of the above, the commission has recommended to Congress 
that:

   The Congress should press the administration to use the WTO 
        dispute settlement mechanism and/or U.S. trade laws, including 
        Section 301 provisions, to seek redress for China's practices 
        in the areas of exchange rate manipulation, denial of trading 
        and distribution rights, massive violations of intellectual 
        property rights (IPR) that have cost U.S. firms billions of 
        dollars, and government subsidies to export industries that 
        harm the competitiveness of U.S.-based manufacturing firms.

   The U.S. Government should make optimum use of the special 
        Section 421 and textile safeguards negotiated as part of 
        China's WTO accession agreement. These important safeguards 
        were designed to prevent our domestic industries from being 
        injured by surges of Chinese exports.

    We note that the commission has reported on the scope of 
intellectual property rights abuses in China and the lack of 
improvement in Chinese enforcement of IPR protections for the past two 
years, and recommended WTO action. We strongly reiterate the need for 
the U.S. Government to take more aggressive action in addressing this 
vital trade issue.
    In addition to addressing the problems of China's exchange rate 
manipulation and its mercantilist trade and investment policies, U.S. 
policymakers must turn their attention to China's impact on 
globalization. In our eagerness to expand trade and investment, too 
little attention has been given to this critical matter.
    Trade and investment are not the ends of policy, but rather the 
means by which we enhance our national well-being. It is not the size 
per se of these flows that matters, but rather their impact. Just as 
intellectual property rights are not self-organizing, it is time to 
recognize that trade and investment rules must be placed in a framework 
designed to deliver maximum well-being. Trade must be standards based, 
and trade agreements with China and other countries must incorporate 
labor rights and environmental standards. We note that the U.S. Trade 
Representative, Ambassador Zoellick, vigorously embraced these concepts 
in a recent editorial in the Washington Post (April 19, 2004).
    Economic action must conform to the fundamental values that guide 
us as a nation. To date, our policy toward globalization has tilted 
toward letting the market determine our values, rather than having the 
market conform to our standards and values.
    We take note of the high-level trade dialogue taking place in 
Washington this week between U.S. and Chinese officials, and are 
hopeful it may result in a breakthrough. We are concerned, however, 
that certain key issues--including China's currency and subsidies 
policies--appear not to be on the table.

         THE CHANGING DYNAMICS OF THE CROSS-STRAIT RELATIONSHIP

    The committee is well aware of the significant events in the Taiwan 
Strait over the past few months, and the growing tensions between the 
two sides. Beginning with Taiwan President Chen Shui-bian's 
announcement late last year that Taiwan would hold a national 
referendum as part of its March 2004 presidential balloting, and 
culminating in the dramatic reelection of President Chen last month, 
the state of cross-Strait relations appears to be entering a new era, 
one that will require new thinking by the administration and the 
Congress.
    This past December and February we held public hearings that 
explored both the economic and security aspects of cross-Strait 
relations and China's military modernization efforts. Members of our 
commission traveled to the region last month and had a chance to talk 
with high-level observers of the cross-Strait situation in Tokyo, Hong 
Kong and Taipei. We also commissioned a study of China's acquisition 
and integration of foreign weapons systems, which is published on our 
website. The annual Department of Defense report on the cross-Strait 
military balance, the 2003 Council on Foreign Relations Study of 
China's Military Capabilities, and published reports of the U.S. Naval 
War College on China's growing submarine warfare capability offer 
additional useful perspectives.
    China's modern arsenal includes a small but increasingly 
sophisticated missile force that is of direct strategic concern. In the 
Western Pacific theater, it is estimated that China has deployed some 
five hundred short-range ballistic missiles that directly threaten 
Taiwan and longer-range conventional missiles that could threaten Japan 
and our forces deployed in the region. China's advanced naval and air 
weapons systems--including surface ships, submarines, anti-ship 
missiles, and advanced fighter aircraft--have been significantly 
enhanced by infusions of foreign military technology, co-production 
assistance and direct purchases, mainly from Russia. China's military 
capabilities increasingly appear to be shaped to fit a Taiwan conflict 
scenario and to target U.S. air and naval forces that could become 
involved.
    We conclude that China is steadily building its capacity to deter 
Taiwan from taking steps that the PRC deems unacceptable movements 
toward independence or consolidation of Taiwan's separate existence, to 
coerce Taiwan into an accommodation, and, ultimately, to have a viable 
option to settle the Taiwan issue by force of arms if necessary. A 
significant component of its military modernization strategy is to 
develop sufficient capabilities to deter U.S. military involvement in 
any cross-Strait conflict.
    The United States cannot wish away this capacity. We cannot assume 
China will stay its hand because it has too much at stake economically 
to risk military conflict over Taiwan. In our view, we should not think 
of the 2008 Beijing Olympics as an insurance policy against Chinese 
coercion of Taiwan.
    We can certainly hope that the economic benefits China gains from 
Taiwan investment and trade; the growing production and supply linkages 
among China, Japan, other Asian economies and the United States; the 
significant value to China of strong economic relations with the United 
States; and China's own desire to be seen by the world as a power that 
is ``peacefully rising'' will constrain China from using military 
force. Hopes, or even reasonable expectations, do not, however, provide 
a defense of vital U.S. interests. This is why it is more important now 
than ever before for the United States to uphold its key obligations 
under the Taiwan Relations Act (TRA) [22 USC 48], notably ``to maintain 
the capacity to resist any resort to force or other forms of coercion 
that would jeopardize the security, or the social or economic system, 
of the people on Taiwan.''
    Under the TRA, the additional U.S. responsibility to assist 
Taiwan's military preparedness is set out clearly. The law requires the 
United States to ``make available to Taiwan such defense articles and 
defense services in such quantity as may be necessary to enable Taiwan 
to maintain a sufficient self-defense capability.'' Notably, it further 
requires that both ``[t]he President and the Congress shall determine 
the nature and quantity of such defense articles and services based 
solely upon their judgment of the needs of Taiwan.'' Thus, the TRA sets 
out a unique joint role in the formulation of Taiwan policy for the 
Congress and administration, including on arms transfers decisions, 
demonstrating Congress' deep and abiding concerns regarding U.S. policy 
in this area.
    Despite the TRA's provisions, we believe that the Congress and 
administration are not adequately coordinating in this area and that 
there are other operational impediments to the United States' ability 
to fulfill its important obligations to Taiwan.
    In addition to providing vital defense support for Taiwan against 
PRC military threats, the TRA further requires U.S. policy to support 
the ``social'' and ``economic'' system of Taiwan. This is an area of 
commitment the United States needs to be more alert to given current 
developments.
    There are a number of key trends developing across the Strait that 
call for a reevaluation of how we implement our Taiwan policy. First, 
there are two paradoxical trends: on the one hand, indirect cross-
Strait economic ties continue to grow with large flows of investment in 
the mainland by Taiwan businesses and a stream of exports from Taiwan 
to feed production platforms. On the other hand we see a deterioration 
in the cross-Strait political situation, with both Beijing and Taipei 
hardening in their positions.
    There is also the PRC's coordinated campaign to continue to 
``marginalize'' Taiwan in the region, both politically and 
economically. Taiwan is being shut out of regional groupings such as 
the ASEAN Plus One or ASEAN Plus Three (China-Japan-South Korea) forums 
and unable to participate in regional trade arrangements like the 
Bangkok Agreement or the China-ASEAN framework agreement on a free 
trade area. Further, Taiwan has been unable to find regional economies 
willing to engage in bilateral free trade arrangements, due largely to 
PRC political pressure.
    Moreover, there has been a gradual de-coupling of Taiwan's large 
and growing investments in China from Taiwan, due to the lack of direct 
transportation links across the Strait. Investors' interests are more 
concentrated in the mainland and less in Taiwan--to the point where 
some observers are asking whether Taiwan is becoming a ``portfolio 
economy'' instead of a ``production economy.'' This has proven true for 
foreign corporations in Taiwan as well as native Taiwan firms. We have 
learned that in recent years the number of U.S. regional operational 
headquarters in Taiwan has declined and offices downgraded to local 
units.
    The key political trend in Taiwan over the past 15 years has been 
the development of a vibrant democracy with new institutional bases. 
This is a valuable product of steady U.S. support for Taiwan, giving it 
the space it needed to develop its social and economic system without 
coercion from the PRC. The proof of the fundamental strength of that 
democratic development was last month's Presidential election in 
Taiwan, which we were privileged to monitor as part of our trip to the 
region. The system was sorely tested but appears to have emerged intact 
and resilient. Should Chen Shui-bian's narrow victory--one in which he 
nevertheless received an absolute majority of the votes cast in an 
election with heavy voter turnout--withstand its legal challenge, it 
will appear to be vindication for Chen's campaign that stressed 
Taiwan's separate identity and a mandate for his plans for 
constitutional reform.
    While the United States should be proud of its role in helping to 
develop strong democratic institutions in Taiwan, Beijing appears 
threatened by these developments. The State Council Taiwan Affairs 
Office (TAO) has issued stern warnings that the path Chen Shui-bian is 
laying out for constitutional reform--a referendum in 2006 and a new or 
amended constitution in 2008--is tantamount to a ``timetable for Taiwan 
independence.'' The TAO reiterated that no progress on cross-Strait 
issues could be achieved unless and until Taiwan accepted Beijing's 
``One China Principle.'' \2\ The prospects for China letting up on its 
strategy of isolating Taiwan--by, for example, allowing Taiwan observer 
status in the World Health Organization, where Taiwan's active 
participation is clearly in the greater interest of China and the East 
Asian region--are dim.
---------------------------------------------------------------------------
    \2\ FBIS Translation of ``Text of Taiwan Affairs Office News 
Conference on Taiwan Election, More,'' CPP20040414000027 Beijing CCTV-
4, in Mandarin, 14 April 2004.
---------------------------------------------------------------------------
    The lack of trust across the Strait is palpable, and it goes both 
ways. Aside from its campaign of isolating Taiwan, China's heavy-handed 
interference in the political process in Hong Kong--discussed later in 
this testimony--has only reinforced Chen Shui-bian's argument that the 
``one country, two systems'' formula Beijing employed in Hong Kong and 
has proposed for cross-Strait unification is totally unacceptable for 
Taiwan. Chen said in his first inaugural speech in 2000 that he is 
willing to talk with Beijing about a ``future one China.'' Beijing has 
steadfastly rejected the implied premise of Chen's approach, taking the 
position that it will only accept cross-Strait talks if Chen agrees as 
a precondition that there is only ``one China'' now and that Taiwan is 
part of it.
    Mr. Chairman, in the face of these current difficulties in the 
Taiwan Strait, we believe the U.S. ``One China Policy''--based on the 
three Sino-U.S. communiques and the Taiwan Relations Act--is the 
historic framework for conducting our official relations with Beijing 
and our unofficial relations with Taiwan. We must remember that this 
policy is U.S. policy, not Taiwan's, not China's. Our policy is 
emphatically not the same thing as the PRC's ``One China Principle.'' 
The United States has not taken a position on the legal status of 
Taiwan. The United States acknowledges Beijing's formulation but does 
not necessarily embrace--or reject--the PRC's concept that ``there is 
but one China in the world and Taiwan is part of China.'' It is also 
true that the United States has stated it does not support Taiwan 
independence, or two Chinas, or one China-one Taiwan--as President 
Clinton reiterated in Shanghai during his visit there in 1998.
    The Taiwan Relations Act has served U.S. interests well over its 
25-year history, and we as a government and nation need to remain 
faithful to it, especially now, when the cross-Strait situation is as 
complex as it has ever been. The fundamentals must be remembered: our 
decision to establish diplomatic relations with the PRC ``rests upon 
the expectation that the future of Taiwan will be determined by 
peaceful means.'' This expectation must be declared at every turn.
    Given the current economic and political trends in the Strait that 
we have outlined above--developments that call into question the state 
of the ``status quo'' in cross-Strait relations--we believe there is an 
immediate need for Congress and the Administration to review our 
policies toward Taiwan and cross-Strait relations and to determine an 
appropriate role for the United States in reinvigorating cross-Strait 
dialogue.
    Accordingly, we have recommended that Congress enhance its 
oversight role in the implementation of the TRA. Executive Branch 
officials should be invited to consult on intentions and report on 
actions taken to implement the TRA through the regular committee 
hearing process of the Congress, thereby allowing for appropriate 
public debate on these important matters. This should include, at a 
minimum, an annual report on Taiwan's request for any military aid and 
a review of U.S.-Taiwan policy in light of the growing importance of 
this issue in U S.-China relations.
    We believe Congress should consider conducting a fresh assessment 
of existing U.S. policy toward Taiwan, with particular attention to 
whether all elements of the TRA are being effectively pursued. This 
should include the coordination of our defense assistance to Taiwan, 
how U.S. policy can better support Taiwan breaking out of the 
international isolation the PRC seeks to impose on it, and examine what 
steps can be taken to help ameliorate Taiwan's marginalization in the 
Asian regional economy.
    Further, we suggest that Congress consult with the administration 
on whether the United States should become more directly engaged in 
facilitating talks across the Taiwan Strait that could lead to direct 
trade and transport links and/or other cross-Strait confidence building 
measures. We will be providing more detailed recommendations on this to 
Congress in our upcoming report.

             HOLDING CHINA TO ITS COMMITMENTS ON HONG KONG

    Mr. Chairman, more than 50,000 American citizens live and work in 
Hong Kong. Over 1,100 American firms operate there, and the United 
States has more than $38.5 billion in investments in the city. These 
direct interests alone demand that the U.S. Government keep a close eye 
on developments in Hong Kong; but there is much more at stake.
    How Beijing lives up to the promise of the Sino-British Joint 
Declaration of 1984 and the Hong Kong Basic Law of 1990 tells us much 
about China's direction. We need to look at Hong Kong to gauge whether 
China is evolving into the more open and tolerant power that China's 
leadership would like us to believe isunfolding. Alternatively, are 
China's leaders bent on ``nipping in the bud'' any domestic call for 
democratic change--even in highly autonomous Hong Kong where such 
change is anticipated under China's own laws--that is not of their own 
making.
    In response to popular calls for direct elections in 2007 for the 
Chief Executive and 2008 for all of the Legislative Council, as allowed 
under the Basic Law, the PRC's National People's Congress Standing 
Committee has made some telling and worrisome moves in recent weeks. 
First, on March 26, the Standing Committee decided on its own to 
intervene in the question of whether and how changes to the methods of 
selecting the Hong Kong Chief Executive and forming the Legislative 
Council could be made. The decision of the Standing Committee to self-
initiate an interpretation of the Basic Law was itself a blow to Hong 
Kong's separate legal and political systems.
    The interpretation issued on April 6 was an additional setback for 
Hong Kong democratic aspirations. It reinforced the message that no 
changes would be made without the central authorities' approval, at the 
beginning and the end of the process. A report by the Chief Executive 
to the Standing Committee would have to start any process of change, 
and the Standing Committee would then give direction as to whether and 
how changes should be made. No initiative would be allowed to rest in 
the hands of Hong Kong's legislature, which was ruled ineligible to 
present any draft bill, even on implementing changes decided by 
Beijing.
    The Chief Executive's immediate action to submit a report to the 
Standing Committee, on April 15, stating there is indeed a need for 
change, has not been taken as a sign of progress among advocates of 
greater democracy in Hong Kong. Rather, the principles laid down in the 
report--reiterating the absolute authority of the Standing Committee in 
all decisions relating to Hong Kong's Basic Law and elections; 
emphasizing the need for a strong ``executive-led'' government--suggest 
that the fix is in.
    We hope we are wrong. We hope Beijing will recognize that its own 
reputation as a modernizing power is at stake in Hong Kong; that not 
just a handful of local democratic activists and ``troublemakers'' care 
about what happens, but that the United States cares, and is paying 
attention.
    Under the Hong Kong Policy Act of 1992 [22 USC 66], the U.S. 
Goverment has an obligation to assess whether Hong Kong's ``high degree 
of autonomy'' and the solemn promise by Beijing to respect Hong Kong's 
governing under the ``one country, two systems'' formula is genuine or 
a charade. Hong Kong's future autonomy was set out in an international 
agreement, the Sino-British Joint Declaration; granted by China's 
National People's Congress; and legislated in the Basic Law. It may be 
true that what the PRC Government giveth, they may taketh away. But 
when Hong Kong's autonomy is diminished by the direct action of the 
central authorities, the United States is obliged to take notice and 
consider its policy options.
    Directly invoking provisions of the Hong Kong Policy Act to suspend 
certain aspects of U.S.-Hong Kong bilateral relations is an option 
which may be considered. If the United States were to end its special 
treatment of Hong Kong in some important areas--such as air services, 
customs treatment, immigration quotas, visa issuance, export controls--
the principal pain would be felt in Hong Kong, however, not in Beijing.
    The Congress and administration should continue to let the Chinese 
leadership know that Beijing's moves to limit Hong Kong's autonomy and 
democratic aspirations are not in any party's long-term interest. And 
that U.S.-China relations will be adversely affected.

        CHINA'S PIVOTAL ROLE IN THE NORTH KOREAN NUCLEAR CRISIS

    The commission's charter calls on us to ``analyze and assess the 
Chinese role in the proliferation of weapons of mass destruction (WMD) 
and other weapons (including dual use technologies) to terrorist-
sponsoring states, and suggest possible steps which the United States 
might take, including economic sanctions, to encourage the Chinese to 
stop such practices.'' In the post-9/11 world, there can be no doubt 
that stemming the tide of WMD proliferation is of the highest national 
priority for the United States. The commission's charge to examine 
China's role in WMD proliferation is part of this effort.
    China has a checkered record at best on controlling its own 
transfers of WMD-related technologies to states of proliferation 
concern, including Iran, North Korea, and Pakistan, something we will 
document in detail in our 2004 Report to Congress. But this past year 
has been marked by a proliferation crisis in which China is now playing 
the role of an intermediary--the North Korea nuclear crisis. Given the 
gravity of the events unfolding in North Korea, the commission felt it 
imperative to examine closely China's participation in efforts to 
resolve this crisis. The key focus of our examination has been: What 
are the U.S. goals for resolving this impasse? What leverage can China 
wield to help bring about that outcome? Can we reasonably expect China 
to be an effective partner? For the commission, the role China plays in 
this crisis is a key, if not the key, test of the U.S.-China 
relationship and pivotal to the future of global non-proliferation 
policies.
    The United States has clearly articulated that it seeks the 
complete, verifiable, and irreversible dismantlement of North Korea's 
nuclear programs. To achieve this proper outcome will require that the 
parties to the Six Party Talks underway with North Korea--the United 
States, Russia, Japan, South Korea, and China--present a strong and 
unified position that this is the only acceptable outcome to ensure the 
region's stability. But it is also necessary that China, North Korea's 
principal ally and financial supporter, demonstrate a willingness to 
exert its considerable leverage over North Korea to bring about this 
outcome. At the present time, we have not witnessed the appropriate 
level of effort from China that the situation warrants.
    North Korea is heavily dependent on Chinese assistance in the form 
of food and fuel. Our research indicates that China provides upwards of 
90 percent of North Korea's oil and 40 percent of its food. Since 1996, 
China has allocated somewhere between 25 to 33 percent of its foreign 
assistance outlays to North Korea. Moreover, the North Korean and 
Chinese militaries have long maintained close ties. These facts clearly 
indicate the considerable leverage Beijing could exert over Pyongyang, 
were it to choose to do so.
    To date, however, China has been playing more of a host and 
intermediary role in the Six Party Talks, and does not appear to be 
pressing for its expeditious resolution. We certainly recognize the key 
role China has played in getting the talks started, and U.S. officials 
have on many occasions lauded China for this accomplishment. At the 
same time, it has become increasingly evident that the current impasse 
may not be broken without a considerably more forceful posture by the 
Chinese.
    To date, China has been opposed to sanctions in this case, and to 
bringing the North Korea nuclear issue to the United Nations. Moreover, 
China issued a cautionary statement regarding any decisive moves by the 
United States and its allies in the context of the U.S.-led 
Proliferation Security Initiative (PSI) that might provoke Pyongyang's 
ire. In a telling statement, the Chinese Foreign Ministry has indicated 
that China ``does not approve of sanctions, blockages and other 
measures which are aimed at putting pressure on (North Korea) . . . 
Doing so will not only be useless to solve the problem, but will 
escalate antagonism and tension.'' \3\
---------------------------------------------------------------------------
    \3\ Catherine Armitage, ``China condemns intercept plan,'' The 
Weekend Australian, 12 July 2003, sec. LOCAL, 6.
---------------------------------------------------------------------------
    Time is not on our side in confronting this crisis. As the Six 
Party Talks drag on, North Korea's nuclear weapons and ballistic 
missile programs keep moving apace. While we cannot be sure just how 
far North Korea has progressed, there seems to be a growing consensus 
that it already posses significant capabilities in this regard and will 
advance considerably further within a matter of months. As these 
capabilities are attained, the prospects for achieving a complete, 
verifiable, and irreversible dismantlement by North Korea are dimming 
substantially. The Six Party Talks must move forward with renewed 
urgency, and with China playing a far more significant role--including 
demonstrating a willingness to exert its considerable leverage with 
North Korea--in obtaining an acceptable outcome.
    The key question is not only whether China will be willing to exert 
leverage in a meaningful way on North Korea, but whether China is 
prepared to press the North Koreans to accept a robust and intrusive 
dismantlement verification regime, an essential component of a 
complete, verifiable, and irreversible dismantlement scenario. North 
Korea's failure to comply with the 1994 Agreed Framework underscores 
the absolute requirement for on-site inspections and verification. 
Given China's posture to date on the PSI, not to mention its own 
continuing proliferation problems, it is certainly a questionable 
proposition. In fact, recent news reports indicate that Chinese 
officials, following a meeting between the Chinese foreign minister and 
North Korean leader Kim Jong Ii, informed a U.S. envoy that the onus 
was on the United States to show more flexibility in resolving the 
crisis.
    In our view, the U.S. Government must make clear to China that its 
efforts in this crisis are a key, if not the key, test of the U.S.-
China relationship. China's efforts in getting the Six Party Talks 
underway must be followed up by the active use of its substantial 
leverage to persuade North Korea to freeze its reprocessing efforts and 
verflably dismantle its nuclear weapons and ballistic missile programs, 
and to accommodate an intrusive international verification regime, to 
ensure effective implementation of any agreement that is ultimately 
reached. In the event of continued stalemate and lack of Chinese 
success in persuading North Korea to accept these requirements, we 
believe the United States must develop other policy options with our 
partners in the region to resolve this highly critical situation.

                               CONCLUSION

    Mr. Chairman and members of the committee, thank you again for this 
opportunity to testify. It is now commonplace to assert that the U.S.-
China relationship will be our most significant bilateral relationship 
during the 21st century. Our trade relations with China already have an 
enormous impact on the U.S. economy, and the security challenges before 
us are of the highest order. Through an appropriate mix of U.S. 
policies, this complex relationship can be managed in such a way as to 
minimize the downside risks, and enhance the prospects of moving China 
toward a more democratic and marketoriented society, to the benefit of 
both our economic and national security interests. If mismanaged, 
bilateral tensions and the potential for conflict will surely grow.
    As we stated at the outset, we have concluded that a number of the 
current trends in U.S.-China relations are presently moving in a 
troublesome direction. With a renewed and candid focus on the 
relationship by the Congress, we are optimistic that U.S. policy toward 
China can be put on a more solid, productive footing to tackle the 
long-term challenges that lie ahead.

    Senator Brownback. Well, I think you put your finger on the 
right button on the right set of issues. Now, whether we will 
see progress made is yet to be determined.
    Mr. Robinson. You bet.
    Senator Brownback. Let's see, let's go back up to the top 
of the list. Dr. Waldron, delighted to have you here today. 
Thank you for being here to testify. We'll run the clock at 
about six minutes, that'll give you an idea, and if we can kind 
of keep close to around that that will give us the chance to 
have more active questions.

STATEMENT OF ARTHUR WALDRON, LAUDER PROFESSOR OF INTERNATIONAL 
  RELATIONS, DEPARTMENT OF HISTORY, UNIVERSITY OF PENNSYLVANIA

    Mr. Waldron. Mr. Chairman, I will do my best. I prepared 
these remarks yesterday; this morning I learned of the 
testimony of Assistant Secretary of State James Kelly, one of 
our best diplomats, to the House International Relations 
Committee yesterday, and I wanted to quickly, and I have 
inserted my additional remarks into my printed testimony and on 
the disk, just say a things about this; this is specifically 
about Taiwan.
    In connection to what Mr. Robinson mentioned--the growing 
desire of the people of Taiwan to assert their own identity--
Assistant Secretary Kelly said that this must be stopped; these 
were his strong words. On the other hand, when it came to the 
Chinese threats of use of force against the island, he stated 
only that we strongly disagree with this approach. He did not 
say that it must be stopped. And let me just quickly make a few 
points.
    The first is that under international law the United States 
has never recognized Chinese sovereignty over Taiwan. That 
continues to be our position, which is that the status of 
Taiwan under international law remains to be determined. 
Therefore, the question of independence seems rather odd. If we 
don't recognize that it's part of China, what is it becoming 
independent of?
    The second point is that we have always insisted on only a 
peaceful resolution of the issue. Period. And I would say, from 
my background as a professor of strategy, that we must be 
absolutely crystal clear on that point, there must be no wiggle 
room.
    The third point is that we must never allow Beijing to 
believe that they are intimidating or manipulating us. My own 
sense is that there is some intimidation going on. I would note 
that I have learned informally that members of our American 
Institute in Taiwan have privately been telling people that 
there's going to be a war next year in the Taiwan Strait unless 
President Chen is somehow reigned in, which I think is 
unprofessional and probably inaccurate.
    Fourth, I think the origin of this problem goes back to 
some faulty diplomacy. Mr. Robinson mentioned the need to re-
examine the 1979 to 1982 framework, and I think that that is 
correct. We've had a policy that expected one thing to happen: 
We expected Taiwan to join China shortly after we broke 
relations. She didn't do that; she democratized instead, and we 
have a series of institutions that are simply incapable of 
dealing with the current reality. Or, another way of putting 
that would be to say that all we have now is a military policy, 
and, oddly enough, we don't have a political policy with 
respect to the island.
    Now, having spoken about that very specifically--I felt I 
couldn't let this pass without commenting on it--let me say a 
little bit about the situation in China today. I think it's 
more volatile than most people understand. Your chosen title 
was ``Reform.'' Well frankly, I don't think reform is the word 
to apply. I think something more like ``major change in several 
dimensions but without any goal specified,'' or ``unplanned 
change,'' is more appropriate. Clearly, all sorts of dynamic 
forces have been released in China: intellectual, political, 
economic, travel, all of these things. Yet if you ask a 
Chinese, where are these going to lead, what is the end state 
that we're trying to achieve, there's absolutely no clarity 
about that at all. Are we aiming for a private, free enterprise 
economy or not? Are we aiming for democratization or not? 
There's complete, sort of agnosticism about the future, even as 
the future is being created by these forces that are unleashed.
    Now, let me speak briefly about political reform. Here I 
think it's important to point out that one lesson of the end of 
the Cold War is that regime type is critical. It's not the case 
that it doesn't matter whether a country is a dictatorship or 
not and that one can somehow deal with them economically and 
militarily regardless of whether their people participate in 
politics. The reason that we are no longer aiming thousands of 
warheads at the Soviet Union and they not aiming them at us, it 
doesn't have to do with SALT treaties, it doesn't have to do 
with summits, it doesn't have to do with people-to-people 
exchanges, although all of those things were important. The 
reason is that the Soviet Union gave up communism, allowed 
people to vote, made its currency convertible, established a 
parliament, freed the press, and allowed political parties to 
form. It transformed itself. And the result of that was peace 
in a Eurasian continent which had previously been threatened by 
massive destruction.
    Now, China continues to be an extremely repressive regime. 
And let me just mention one fact, which is the assistance that 
American companies have given to the Chinese secret police in 
creating a very, very sophisticated network for monitoring the 
Internet, tracking individual users, blocking web sites; they 
can even monitor cell phone conversations and text messaging, 
store this material, search it with high-speed computers and 
obtain profiles of what individuals do. Now, not all Chinese 
are happy with this. According to Radio Free Asia there were 
some 10 million people who participated in demonstrations, 
thousands of demonstrations, at various places in China last 
year. So my own feeling is that politically the situation is 
rather challenging and that an enlightened government would, at 
this point, have begun to make changes. But they have not done 
that which implies that the change will come in a rather 
surprising way.
    Let me now turn quickly to the economy. First of all, it's 
not a market economy, despite what the administration said 
yesterday within their economic negotiations. There's no way 
that China is a market economy. It's growing fast, but the 
growth is based on exports, foreign investment, and massive 
borrowing. In my written testimony I go into some detail about 
the unsustainable levels of borrowing and debt that are being 
created. I think that it is the consensus of experts on the 
Chinese economy that it's headed for some kind of landing, hard 
or soft. A crunch is going to come.
    Now let me briefly say something about the military 
buildup. I thought Mr. Lawless's testimony was excellent, 
although, as he said to me in the break, it's just the tip of 
the iceberg. The military is now the king-maker in China. 
Politicians, those who want to advance, lavish money on the 
military, create generals and so forth. The Chinese buildup is 
substantial, and it does not affect just, for instance, say 
Taiwan; it directly affects Japan, Korea, India, Indonesia, you 
name it, even Russia. I always wonder why the Russians are 
selling all of this stuff to China; they are, but it makes no 
sense. And if this military rearmament were to continue without 
some kind of countervailing rebalancing, we would have a very, 
very serious situation in East Asia. Two specific points on 
this: First, Americans should understand that the Chinese 
military is the only one in the world that is being developed 
specifically to fight the United States. If you look at, for 
instance, the purchases of missiles from the former Soviet 
Union, many of these have only one use, and that is to destroy 
aircraft carriers, which they can do; we have no defense 
against these supersonic missiles. Now, you might say that 
their target was the aircraft carrier Charles de Gaulle, but I 
don't think so. I think that they have the great American 
carrier battle groups in mind, and, as I say, we have no 
defense against this. This is certainly not a cause for 
complacency.
    The second point, and I thought your questioning of Mr. 
Lawless brought this out, is that although many people will say 
that China seeks only minimal deterrence and has no great power 
ambitions, my own view is that there is no objective reason 
that if the present regime stays in power--this is why regime 
change is so important, or change of regime type--there's no 
reason that China should not become every bit as strong and 
threatening as the Soviet Union was at its height. Because, as 
Mr. Lawless pointed out, the conditions that constrained the 
Soviet Union, economic conditions and so forth, don't apply in 
the case of China.
    To conclude, received opinion in Washington troubles me a 
bit because the opinion seems to be that, in spite of all of 
these worrying indicators, change is going on, and the 
democratization is eventually, she's going to come right in the 
end and we'll all be friends. Let's say that I hope that 
happens. However, the only way that China can be a positive 
player in the region and in the world and be a real friend to 
the United States is for her to abandon the Communist 
dictatorship, as the USSR and the former satellites did, 
introduce freedom and democracy, and redirect spending away 
from things like the military and prestige projects and toward 
the needs of the people. I would point out that as of September 
of last year the average Chinese farmer had an income somewhere 
between $300 and $400 U.S. per year--that's very, very low; the 
average urban resident about $700 or $800.
    Now, let's hope that these changes will occur. There's much 
that we could do to help them occur, and we should. But we must 
not stake our policy on the idea that they will occur. Things 
could go well or they could go very wrong. And what we need is 
a China policy that can deal with either outcome.
    Thank you very much.

    [The prepared statement of Mr. Waldron follows:]

                  Prepared Statement of Arthur Waldron

                          a note about taiwan
    In light of Assistant Secretary of State James Kelly's remarks 
yesterday to the House International Relations Committee, I would like 
to preface my testimony with a few words that are not found in the 
printed handout, but are on the disk.
    First, it is important to realize that the United States has never 
recognized Chinese sovereignty over Taiwan, whether that sovereignty 
was claimed by Chiang Kai-shek's Republic of China government, which we 
nevertheless recognized until 1979 as the legitimate government of 
China, or by the People's Republic of China, whose claims to Taiwan we 
only ``acknowledge'' but do not accept, as is clear in the transcripts 
of Mr. Kissinger's discussions, and was reiterated by the Clinton 
administration, when Press Secretary Mike McCurry was forced to correct 
remarks to the contrary. Our consistent position is that the status of 
Taiwan under international law ``remains to be determined.''
    Therefore the phrase ``one China policy'' does not mean that we 
recognize Taiwan as part of China: we do not. Rather, it means that 
while we did recognize both East and West Germany, and could well 
recognize both North and South Korea, in the case of China we have 
decided that we can recognize only one government. That was a problem 
only when Taipei presented itself as the government of all of China. 
This it no longer does.
    Yesterday Mr. Kelly, one of our finest diplomats, revealed the 
growing confusion about our China and Taiwan policies when he stated 
flatly that efforts by Taiwan to assert its own independent national 
identity ``must be stopped''--strong words--while saying of China's 
threats to use force against the island only that ``we strongly 
disagree with the approach.'' He did not say that it ``must be 
stopped.''
    Clearly we are in a bind here. On the one hand we have never 
recognized that Taiwan is part of China. Yet we are deeply concerned 
lest it declare ``independence.'' Independence from what? Unless it is 
a part of China, which we do not accept, it is already independent.
    Briefly we have three problems here:

          First, by responding as it has to democratic developments in 
        Taiwan, Washington risks bringing its commitment to democracy 
        into question.

          Second, I have no doubt that the current concern in the 
        administration arises from China's increasing military strength 
        and growing talk about using it against Taiwan. To be frank, we 
        are appearing to be intimidated, something no great power 
        should ever allow. Of course we want cooperation from Taiwan on 
        avoiding conflict, but whom should we insist ``be stopped?'' 
        Not so much Taiwan, as China--for it is China that has the 
        immense military and China that is making the threats of war. 
        It is not enough to ``strongly disagree'' with China's menacing 
        approach. We must make clear that we reject it, period.

          Third, I think we have a lesson here in diplomatic plans gone 
        awry. When President Carter severed all relations with Taiwan 
        in 1979, his assumption, I think, was that the island, then 
        ruled autocratically, would become part of China through an 
        agreement over the heads of the people of Taiwan, between 
        Taipei's unelected leaders, and the unelected leaders in 
        Beijing.

    We did not consider the possibility that Taiwan would reform and 
liberalize and democratize. So not only did we fail to plan for such a 
possibility, we gave away all sorts of things that would have helped us 
to deal with that situation, for instance by failing to insist that 
Taipei remain in the UN General Assembly.
    Thinking we were stabilizing the situation, we unwittingly created 
deep instability in the Taiwan Strait under the Carter administration. 
Historical development took off in a direction we had scarcely 
considered and for which we were unprepared. The answer today is not to 
try to put things back the way they were--like King Canute, 
proverbially lashing the incoming tide to force it to retreat--but 
rather to begin to rethink our whole approach, dealing with the current 
reality and not the failed expectations of thirty years ago.

                              INTRODUCTION

    The situation in China today is more volatile than most observers 
understand. ``Reform'' is not quite the word to apply to what is 
happening there; something like ``unplanned but major change in several 
dimensions'' would be more appropriate. For although economic, 
political, and social forces have been released over the past quarter 
century that will certainly take China somewhere, no one in China can 
specify exactly to where that will be. No plan or roadmap exists. So 
when change does come, as it most certainly will, most likely it will 
be unexpected and discontinuous, which means that it will have the 
potential to affect not only China, but also her neighbors, the world 
economy, and direct interests of the United States and its friends and 
allies.

                    NO PROGRESS ON POLITICAL REFORM

    Politically, the Communist Party seems intent on maintaining its 
slipping hold on power. No signs of progress are visible in areas such 
as the establishment of real law and impartial courts, the freeing of 
speech and political and religious activity, or the constitution of 
legitimate government by voting at local and national levels. Quite the 
opposite: political repression is, if anything, increasing. With the 
help of American companies, China has created a highly sophisticated 
system for monitoring the internet, tracking individual users, blocking 
access to web sites. Thanks to powerful new computers and technology, 
China's secret police even has the ability to monitor cell phone 
conversations and text messaging, and to store and screen messages in 
detail. This monitoring ability extends to an increasingly well 
developed Chinese secret police network in the United States, operated 
out of the Chinese embassy and consulates, and now so deeply rooted on 
our university campuses that a Chinese dissident can be monitored by 
Beijing almost as easily here as in China.
    More conventionally, the freedom even of the Party-run press has, 
if anything, been curtailed in the past year, with a number of editors 
being fired, and some publications closed. Even respected academic 
specialists in such areas as economics often find it impossible to 
publish their opinions in the Chinese press, while nothing remotely 
resembling dissent--or even USA Today style of editorials, one pro and 
one con, is to be found.
    This situation cannot last, for as Chinese sages taught thousands 
of years ago, imposing dictatorship depends upon keeping the people 
ignorant and tied to the land, as they were in the Qin dynasty (221-206 
B.C.E.) and again under Mao Zedong (1949-1976). Since Mao's death new 
forces have been unleashed, not least of which are intellectual and 
political. China's educational institutions have begun to regain some 
of their pre-Communist distinction. The number of highly educated 
people has grown, and so has the number of those who have traveled or 
lived abroad. In addition, Chinese people are beginning to own their 
own dwellings, have a bit of money, and feel a stake in society. Put 
simply, the system has begun to turn out citizens, or rather potential 
citizens--for at the moment these educated and thoughtful people (like 
the farmers, who also have a certain wisdom) are denied any meaningful 
influence on how they are governed. Officials are appointed, not 
elected--even mayors. At the top, no transition of rule has ever 
occurred in the PRC that actually followed the Constitution or even the 
rules of the Communist Party. The current ruler, Hu Jintao, was simply 
designated by the late strong-man Deng Xiaoping, at the time of the 
Tiananmen massacre, to succeed Jiang Zemin, who was installed in power 
immediately--and quite illegally--while Premier Zhao Ziyang was placed 
under house arrest (which continues). This lack of even a defined 
system for choosing a leader is a powerful contrast to India (where 
even a series of assassinations never disrupted constitutional rule), 
Japan, South Korea, Taiwan, and numerous other countries. Politically 
the Chinese system remains rather primitive and lacking in legitimacy.
    It also quite evidently lacks any feeling of the urgency of reform. 
One reason for this is that the leadership is deeply divided, and 
things work best in the short term if everyone is allowed to do more or 
less as they want. But that approach will work only in the short term. 
As economic development makes China more complex, the need for 
objective mechanisms, for choosing leaders responsive to popular needs 
and wishes, and for resolving disputes objectively, will become 
inescapable. Doing those things will require that the Communist Party 
give up power.
    If the Party does not move on its own, it will probably face 
increasing internal division and popular turbulence, which may effect 
the sort of change it is unwilling to carry out itself. That sort of 
chaotic shift is worrying enough. But even more worrying is the 
possibility that the Party will somehow retain control, and develop 
China into a state having a dictatorial government having unfulfilled 
territorial aspirations (see below), a sizeable treasury and military, 
and no internal checks and balances.
    The unwillingness of the Party to consider change is clear in its 
approach to Hong Kong, to which it promised democracy in 1984. In the 
past year or so, as the people of Hong Kong began to call for real 
progress towards actually electing their government, Beijing seems to 
have panicked and, in effect, torn up all its promises in favor of rule 
from the center, intermediated by carefully selected pro-Beijing 
locals. To some extent Beijing must be bluffing, for she lacks the 
capacity to coerce Hong Kong (as she did her own capital in 1989) 
without destroying the hub of her most advanced economic region. Yet so 
strong is the instinct for control that the central government has 
adopted quite astonishingly hard line talk and methods.
    The same unwillingness is demonstrated in Beijing's policy toward 
Taiwan, now a democracy, and a state having a national character and 
identity quite different to that of the People's Republic. Taiwan would 
like to coexist with China and enjoy the benefits such coexistence 
would bring to both sides. For more than a dozen years the government 
in Taipei has been offering to negotiate with China, but after a brief 
start in 1993 in Singapore, Beijing has refused all offers to meet. 
Instead, she has adopted a strategy of pressuring Washington, somehow, 
to force Taiwan to do what she says--which is of course both impossible 
and dangerous.
    So, much as we may all hope for political reform leading to freedom 
and democracy in China, and however much we may be heartened by the 
occasional liberal straw in the wind, it is essential that we recognize 
clearly the complete lack of progress in this area at least since 1989. 
We should talk to the Chinese about this; we should never be bashful 
about listing prisoners or condemning abuses--but we must not comfort 
ourselves with the illusion that the present leaders are ``reformers.'' 
They are not. They are dictators, having aspirations to a sort of 
totalitarianism they cannot achieve (this is evident in their approach 
to religion), improvising expedients to stay in power, whatever it 
takes--arrests, propaganda, whipping up xenophobia, even perhaps a 
``Splendid Little War.'' These leaders are to be treated with great 
care and caution, even as we are mindful of the precariousness of their 
power.

                          A PRECARIOUS ECONOMY

    Economically, China is in the midst of an unsustainable boom and 
headed for a hard or a soft landing, depending upon policy. China's 
astronomical growth rates are not entirely credible, and, to the extent 
they are real, they do not represent healthy growth. By and large they 
are the product of three factors: (1) exports, which as we know, are 
soaring; (2) foreign investment, which is fine so long as it does not 
substitute for the development of Chinese entrepreneurship. Sadly, a 
good half of China's exports are accounted for by firms having foreign 
participation, and in some key sectors foreign ownership is greater 
than Chinese (in Information Technology, for example, Taiwanese 
investors own roughly 70% of China's capacity), and (3) massive state 
investment, based on government-directed borrowing from the state-owned 
banks (the only place Chinese can put their savings)--such borrowing 
goes heavily to support loss-making state enterprises, rather than to 
genuinely profitable uses. Chinese growth, in other words, is not being 
created by increased productivity and efficiency, the proverbial 
``assignment of goods to their highest paid uses,'' but rather by a 
torrent of capital investment, both foreign and state, much of which is 
misallocated and thus wasted.
    To be more specific, last year in 2003 non-farm investment 
increased at three times the rate of GDP. So far this year that rate 
has doubled again. Year on year it is up 53% in the first two months of 
2004. Investment by state enterprises is up 55% with investment in 
industry up an astonishing 79%. Purchases of building materials in the 
first two months of this year grew at an annualized rate of 137%. 
Chinese demand for oil--a commodity of which the globe has only a 
limited supply--has now passed that of Japan, to stand second to our 
own country, which consumes roughly four times as much. Not 
surprisingly world commodity prices are beginning to rise in response.
    But this is artificial demand, driven above all by state directed 
loans to state enterprises. It is not the product, as some would have 
us believe, of dynamic ``free enterprise'' or ``entrepreneurship'' in 
China. If anything, the entrepreneurial class, is being squeezed out 
and denied capital of which it could make good use, by extravagant 
state lending (only 1% of which goes to the private sector) and by 
foreign investment, which often receives preferential treatment.
    The result of all this is of course insolvency in the banking 
system (experts disagree about the exact percentage of bad loans, but 
an estimate of one third would be conservative) and growing government 
debt. Local currency loans through February of this year alone rose by 
20.7% year to year, to $1.98 trillion. New loans in the past year alone 
amount to one quarter of GDP. Total government debt, including unfunded 
liabilities for unemployment, for medical care, and retirement for 
state workers, is of course far larger.
    Although plans are regularly announced to reduce the rate of growth 
of debt, purge the banks of non-performing loans, rein in over-
investment, and so forth, so far these have little to show. China is of 
course not the only country where fiscal irresponsibility may be 
politically expedient. But in today's world she is nearly unique in the 
all-important role that governments, central and local, play in 
deciding, not always very rationally, what will be invested and where. 
So even though countries such as the United States and Japan also face 
massive fiscal and debt problems, in both of them the economy as a 
whole is sound and productive. Both are host to dozens and dozens of 
world-class global companies, and have been for many years. If we count 
twenty-eight years from the creation of the Ministry of International 
Trade and Industry in Japan in 1949, we reach 1977, by which time Japan 
already boasted such players as Honda, Fujitsu, Kyocera, NEC, and 
others. By contrast, count the same number of years from Mao's death in 
1976, when so-called ``reform'' began, and you reach the present--and 
the worrying realization that even after all that time, China has yet 
to produce a genuinely world-class competitive company, whether private 
or state owned.
    Most worrying, perhaps, is the rapid growth in regional and 
personal inequalities of income owed to state misallocation of 
resources, and to massive corruption. In September of last year rural 
incomes in China averaged $217 U.S., while urban incomes were at $766 
U.S. Hundreds of millions of farmers remain dirt poor and deprived of 
all political rights as well. Tens of millions of unemployed rural 
workers roam the urban areas, sleeping on streets, working at 
construction and other hard labor, or trading, without any provision 
for health, education, or even wages. (Official estimates of 
unemployment are now touching 14%). Nor is the typical Chinese urbanite 
the fashionable young woman one reads of so often, stopping in at a 
fashionable Shanghai boutique to spend $400 on a pair of the latest 
shoes. Urban life has a much more uniformly early industrial revolution 
shade of gray about it than we often realize.
    So we have a vicious circle. Population and unemployment are 
rising, which pose an obvious threat to order in China. Unwilling to 
unleash the private sector, which already accounts for half to two 
thirds of new jobs in some areas, the state insists on taking the 
precious savings of the impoverished Chinese people and pouring them 
into make-work projects that may absorb some labor for a while, but are 
unlikely ever to be profitable, which is to say, provide real long-term 
jobs. The money thus wasted cannot be recovered: it is a vast, wasted, 
opportunity cost. Nor does China have the resources to continue to 
waste money at such a rate.
    As one economist at the Chinese State Development Bank recently put 
it, ``All the characteristics of China's financial industry today are 
similar to those found in Thailand before the Asian financial crisis 
[of 1997]. The probability of a crisis erupting in China is rising.'' 
This comment, by a well qualified Chinese economist, deserves careful 
note.
    Sooner or later a crunch will come, with the ordinary people being 
the chief victims--as the perpetrators will mostly have expatriated 
first their money and then themselves ahead of time. We can only guess 
about the consequences for the rest of the world, and for the Chinese 
regime.

                            MILITARY BUILDUP

    Finally, and perhaps most importantly, China is engaged in a 
massive military buildup, to which both Washington and China's 
neighbors unaccountably pay far from adequate attention.
    Ever since the sack of Beijing by the People's Liberation Army in 
June of 1989, that army has been dissatisfied and ashamed of what it 
did. I have been told as much personally by a very senior Chinese 
military commander. Chinese join the army to protect their country, not 
to kill their fellow citizens. Furthermore, ever since Mao died in 
1976, and his chosen successors were swept away by a coup d'etat of the 
8341 unit, or capital bodyguard division, the military has been the 
ultimate kingmaker in China. Put these two facts together, and it 
becomes clear why over the past dozen years or so members of the 
Chinese Communist ruling elite who lack military ties have been so 
eager to create them.
    Since the Tiananmen massacre, the PLA has been given immense budget 
increases, difficult to estimate but obvious when one considers new 
military hardware, the space program (which has strong military 
dimension), and huge increases in research and development and military 
production capability. Jiang Zemin, China's former president who 
retains a great deal of power today as Chairman of the Military 
Commission, created numerous field and flag level officers in a bid to 
win loyalty. Now, evidently, Jiang's ostensible successor, Hu Jintao 
has also established his own military headquarters, in the Western 
Hills, in an attempt to counterbalance Jiang's continuing influence 
over the military and security apparatus.
    At the same time the military has been given a new mission: not so 
much national defense (as no country seems to have any desire to attack 
China) but rather national expansion, or as it would be put in China, 
``recovery'' of lost national territories--to most of which Beijing 
holds only the most tenuous of claims. Hence we have seen repeated 
Chinese probes into the Japanese Senkaku Island chain (Diaoyutai in 
Chinese) which have deeply irritated Tokyo and, along with the 
acquisition of nuclear weapons by North Korea, evidently set Japan on a 
course toward military self-sufficiency: very bad news for Beijing. We 
have seen ``archaeological'' research carried out that reassigns the 
ancient Korean kingdom of Koguryo to the ``Chinese'' world, which would 
mean that Korea almost to the 38th parallel would be Chinese. This is a 
difficult move to judge, but it is hard to resist the conclusion that 
it prepares the way for possible intervention to prevent Korean 
unification. On the Indian border, China has proved most unforthcoming 
about territories occupied in the 1962 war--and some territory given to 
China by Pakistan. As with Japan, Beijing's condescending and ham-
fisted approach to India has led to terrible strategic consequences, in 
the form of a nuclear armed India alert to its national interests. 
Without Chinese assistance, the Pakistani nuclear program would have 
been little more than blackboards and some smart physicists. In the 
South China Sea, China is asserting sovereignty over various reefs and 
islands, some seized from Vietnam, another from the Philippines, 
probably with a view to declaring the entire area territorial waters. 
And of course there is Taiwan, against which China is carrying out an 
unprecedented military buildup. She will soon possess more advanced 
fighter aircraft than Taiwan does; her submarine and surface fleets are 
growing, and she has roughly 500 missiles--one for every 45,000 
Taiwanese--aimed at the island. Russia seems not yet to have grasped 
fully the potential threat to her interests that this newly well-armed 
China poses (Moscow, after all, is a major source of weapons and 
technology), but that realization may come soon. Added together, all of 
this portends increasing tension and danger in Asia, as China attempts 
to shift the military balance decisively in her favor--an action, 
however, more likely to elicit a balancing coalition than lead to 
success.
    Most importantly, however, Americans should understand that the new 
Chinese military is the only one being developed anywhere in the world 
today that is specifically configured to fight the United States of 
America. Thus China has gone to great lengths to acquire supersonic 
missiles from Russia that were originally designed by the USSR to 
destroy American aircraft carriers. Her researchers are deeply involved 
in identifying potential weaknesses in the American military. She is 
working hard on counter-stealth technologies, lasers, cruise missiles, 
space surveillance, and weapons that target our vulnerable 
communications and other links. Many argue that China seeks only 
minimal deterrence and a certain degree of influence in Asia, But that 
does not account for the vast scale of, for instance, her ICBM and 
space programs, nor for her development of specific systems to target 
American forces. My own view is that no objective reason exists why 
China, if she stays on her present course, should not eventually pose 
an even greater threat to the United States and its friends and allies 
than did the Soviet Union.

                               CONCLUSION

    Received opinion in Washington appears to be, overwhelmingly, that 
in spite of the worrying indicators I have mentioned, China is in a 
process of change and democratization that will make her eventually 
into our close friend, rather than competitor or adversary. Most people 
remain highly bullish about the Chinese economy, despite the warning 
lights I have mentioned. American business has made itself increasingly 
dependent upon China, regularly provides technologies it should not 
(e.g. for internet surveillance) and increasingly lobbies for Chinese 
wishes in Washington. Many also believe that U.S. policy mistakes 
(support for Taiwan, for example) rather than Chinese political 
competition and strategic debates, explain whatever difficulties or 
menaces may seem to appear. The result is an extraordinary degree of 
complacency in the face of potentially real threats.
    Those threats may never become real, but if they do not, the reason 
is likely to be more than just good luck. It will be the result of 
serious American and allied action to cut off Chinese access to 
advanced military technology, enhance the defensive and deterrent 
abilities of the free countries in Asia that are our real friends, and 
straight talk with the Chinese government.
    In the longer run, the only assurance of our interests and those of 
our Asian friends and allies will be for China to abandon Communist 
dictatorship, as the USSR and its former satellite states did, 
introduce freedom and democracy, and redirect spending away from 
prestige projects (such as the Olympics and extravagant new buildings 
in Beijing and Shanghai) and toward the still-pressing needs of her 
people.
    This may occur. The U.S. can do much to help it to occur, and 
should. But we must not count on its occurring. Things could go very 
well, or they could go very wrong. We need a China policy that can deal 
with either outcome.

    Senator Brownback. Thank you very much for those insightful 
comments.
    Ms. Lee, good to see you again. I look forward to your 
testimony. I don't know if you caught the earlier panel, but 
we've already spoken some about the case that's been put 
forward. I look forward to hearing your specifics about that 
case.

   STATEMENT OF THEA M. LEE, CHIEF INTERNATIONAL ECONOMIST, 
    AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL 
                         ORGANIZATIONS

    Ms. Lee. Thank you so much, Mr. Chairman, for the 
invitation to come today and testify on behalf of the AFL-CIO. 
We appreciate that. And I also appreciate your personal 
interest and concern in the issues that we've raised with 
respect to workers' rights and human rights.
    I want to talk today about a crucial issue in the U.S.-
China economic relationship that we believe has not received 
the attention it deserves from this or previous 
administrations, and that is, as you've said, the brutal 
repression of workers' rights by the Chinese Government and the 
impact of that repression on American workers. This is 
particularly important this week, as Mr. Robinson noted, since 
we've just concluded a very high level annual meeting, the 
Joint Commission on Commerce and Trade. From all the press 
reports, it appears that workers' rights was not even on the 
agenda, from the point of view of the Bush administration, 
while other issues, such as intellectual property rights 
protections and some sectoral market access issues were 
discussed. Another issue that did not appear to be on the 
agenda was the Chinese Government's manipulation and 
undervaluation of its currency. These two issues together, the 
currency undervaluation and the workers' rights repression, to 
us are the two key economic problems in the U.S.-China 
relationship that account together for many of the hundreds of 
thousands of U.S. jobs that are lost due to this economic 
relationship. We are disappointed that the administration chose 
not to put a priority on these important issues in these high 
level talks.
    As you know, on March 16 the AFL-CIO filed a Section 301 
petition with the U.S. Trade Representative, alleging that 
China's violation of workers' rights is an unfair trade 
practice under U.S. trade law. This is the first time that 
Section 301 has ever been used in that way. We think this is a 
really important innovation and an important message, both to 
our own Government and to the Chinese Government, that the 
unfair cost advantage that comes from repressing the human 
rights of workers is contributing to the $124 billion trade 
deficit the United States has with China, the highest bilateral 
trade deficit between any two countries in the history of the 
world. This unfair cost advantage contributes to the hundreds 
of thousands of U.S. jobs lost. We think we've clearly met the 
standard of Section 301, that this is a burden and restriction 
on U.S. commerce and that there's a persistent pattern of 
violation of workers' rights on the part of the Chinese 
government.
    If we don't address the systematic, egregious and 
institutionalized repression of workers' rights in China, we'll 
continue to lose hundreds of thousands of good jobs here. We're 
creating conditions of desperation and exploitation in China 
and fundamentally altering the nature of global labor 
competition in the rest of the world. Workers in developing 
countries, that I think Mr. Craner mentioned earlier, are 
impacted by the kinds of competition that we will or won't 
tolerate with respect to China, and I know you mentioned that 
as well. So our petition seeks to ensure that our Government 
will give this issue the priority it deserves in its economic 
dialogue with the Chinese Government.
    Chinese Vice Premier Wu Yi said this week to The New York 
Times that the allegations in our petition are groundless and 
she invited the AFL-CIO to come to China to see for ourselves 
what the conditions are. In response to her charge that the 
allegations are groundless, as you know, the documentation in 
the petition is quite extensive and credible and, as Mr. Craner 
said, relies heavily on extremely credible sources, such as the 
U.S. State Department, the International Labor Organization, 
the International Confederation of Free Trade Unions, The New 
York Times, The Washington Post, and so on. We're very 
confident that the evidence that we've put together will stand 
up to scrutiny. We also would be very interested in being able 
to go to China and further investigate some of the allegations 
that were made. We've always said in the past to the Chinese 
Government that if we are to go to China we want to be able to 
have access to Chinese labor dissidents who are in jail, as 
well as the official union representatives. We want to be able 
to meet with workers on our own terms without any kind of 
government supervision or restriction and to bring our own 
translators and so on. So if we can meet all those conditions 
we would be very happy to go to China and investigate further.
    As you know, the allegations have to do with the denial of 
freedom of association, the right to bargain collectively; 
Chinese workers simply don't have the right to organize an 
independent union. They are limited to the government-
controlled body, the All China Federation of Trade Unions. 
Workers who attempt to strike or organize unions independent of 
that body have been arrested, imprisoned, beaten and tortured. 
Even speaking out at the workplace has been often grounds for 
severe reprisals and arrest.
    We've very concerned about the conditions of forced labor, 
essentially, that exist for many migrant workers. As we've 
discussed, the migrant workers in China work under a system 
where they're disempowered and vulnerable, often caught between 
unscrupulous employers and an indifferent government.
    The Chinese Government has simply failed to enforce its own 
labor laws with respect to minimum wage, maximum hours of work, 
and health and safety. The results are that workers are left 
really defenseless at the workplace, and this is simply an 
unacceptable situation.
    We don't challenge the fact of low wages in China. We 
understand that a developing country with an excess supply of 
poorly educated rural workers will have low wages. We 
understand that even if China were to fully enforce workers' 
rights we wouldn't completely close the wage gap between 
Chinese and American workers. But we think it would surely 
narrow. And what the AFL-CIO petition challenges is the 
incremental cost advantage that comes from the brutal and 
undemocratic repression of workers' human rights. That 
incremental advantage is illegitimate under universal norms of 
human rights and it's illegitimate under U.S. trade laws.
    The AFL-CIO petition shows what the economic burden is on 
the United States, that there's a cost advantage of between 10 
and 77 percent that comes specifically from the repression of 
workers' rights. We ask the President to take trade measures 
that will offset this illegitimate advantage, to negotiate an 
agreement with the Chinese Government to meet concrete 
benchmarks of compliance with workers' rights. As those 
benchmarks are met, the tariff can be gradually reduced.
    And third, we ask the President not to enter into new WTO 
agreements until the WTO incorporates enforceable workers' 
rights as a condition of WTO membership, so that we can have 
protection for workers' rights throughout the trading system 
through multilateral rules. Global rules should fairly enforce 
basic workers' rights to ensure that competition does not 
reward and encourage repression of human rights at the 
workplace.
    I thank you very much for your attention, and I look 
forward to your questions.

    [The prepared statement of Ms. Lee follows:]

                   Prepared Statement of Thea M. Lee

    Mr. Chairman, members of the subcommittee, I want to thank you for 
the opportunity to testify today on a crucial issue in the U.S.-China 
economic relationship that has not received the attention it deserves--
from this or previous administrations: the brutal repression of 
workers' rights by the Chinese government and the impact of that 
repression on American workers.
    This is particularly important now, as the U.S. and Chinese 
governments conclude a high-level annual meeting, the Joint Commission 
on Commerce and Trade. From early press reports, it does not appear 
that workers' rights are on the agenda, while other issues, such as 
intellectual property rights protection and market access were 
scheduled to be discussed. Another key issue that does not appear to be 
on the agenda is the Chinese government's manipulation and 
undervaluation of its currency, which we believe is also adversely 
affecting American workers, producers, and jobs.
    On March 16th, the AFL-CIO filed an unprecedented petition with the 
United States Trade Representative under Section 301 of the Trade Act 
of 1974, asking the Trade Representative to take action to end the 
Chinese government's repression of the human rights of its factory 
workers.
    This marks the first time in the history of Section 301 that a 
petition has invoked the violation of workers' rights as an unfair 
trade practice, although it is quite common for corporations or the 
government to use Section 301 to challenge commercial unfair trade 
practices, such as illegal subsidies or violations of intellectual 
property rights.
    The petition shows, first, that the Chinese government engages in a 
``persistent pattern'' of denying the fundamental rights of its factory 
workers.\1\ Second, it demonstrates that China's violation of workers' 
rights artificially reduces wages and production costs in China and, as 
a result, displaces hundreds of thousands of manufacturing jobs in the 
United States. This unfair cost advantage has contributed to the 
stunning bilateral trade deficit with China, which hit $124 billion in 
2003--the highest bilateral trade deficit between any two countries in 
the history of the world. Under the terms of Section 301, we argue that 
this clearly ``burdens and restricts'' U.S. commerce.
---------------------------------------------------------------------------
    \1\ The internationally recognized workers' rights enumerated under 
Section 301 include freedom of association and the right to organize 
and bargain collectively, prohibitions on child and forced labor, and 
acceptable conditions with respect to minimum wages, hours of work, and 
health and safety.
---------------------------------------------------------------------------
    China's brutal repression of workers' rights is, in our view, the 
most important issue in the U.S.-China trade relationship. Failure to 
address the systematic, egregious, and institutionalized repression of 
workers' rights in China costs hundreds of thousands of good jobs here, 
creates conditions of desperation and exploitation in China, and 
fundamentally alters the nature of global labor competition in the rest 
of the world. The AFL-CIO's 301 petition seeks to ensure that our 
government will give this issue the priority it deserves in its 
economic dialogue with the Chinese government.

                      CHINA DENIES WORKERS' RIGHTS

    There is overwhelming evidence that the Chinese Government denies 
the workers' rights covered by Section 301. The petition amasses 
evidence from the U.S. State Department, the International Labor 
Organization (ILO), labor unions, academics, newspaper accounts, and 
human rights groups.
    China denies freedom of association and the right to bargain 
collectively. The Chinese Government relentlessly represses attempts to 
organize unions that are independent of the government-controlled All-
China Federation of Trade Unions (ACFTU). The ACFTU is officially and 
legally subservient to the Communist Party and to local officials who 
profit from export enterprises. Workers who attempt to strike or 
organize unions independent of the ACFTU have been arrested, 
imprisoned, beaten, and tortured. Even workers who have spoken out 
against corrupt managers or who have attempted to publicize workplace 
problems have been subject to severe reprisals and arrest.
    Conditions of forced labor are widespread. Many of the workers in 
China's export sector are temporary migrants from the countryside, who 
work under a system of internal passports that is similar to the pass 
system in apartheid-era South Africa. Factory workers are permanently 
registered to live in their rural villages, and have few civil or 
political rights when they work temporarily in factory towns and 
cities. Upon arrival to the factories, migrant workers become heavily 
indebted in order to pay large ``deposits'' and other fees to their 
employers. They lose their deposit if they quit without the employer's 
consent. They are thereby essentially turned into bonded laborers who 
cannot leave their employment without incurring large and 
disproportionate penalties. The wages, conditions of work, and hours 
often turn out to be quite inferior to what is promised upon arrival, 
meaning that workers have clearly not entered into a free labor market, 
with fairly enforced rules.
    China does not enforce its own laws with respect to minimum wages, 
maximum hours, and workplace safety and health. Many manufacturers in 
China, including multinational corporations, pay their workers much 
less than the minimum wage standards set by the central and provincial 
governments. It is apparently common for companies to keep double and 
triple sets of books, to hide this practice. Workplace safety and 
health practices are atrocious, and China has the highest rate of 
industrial deaths and accidents in the world. Government officials 
simply do not enforce their own laws on wages, hours, and safety and 
health.
    The AFL-CIO's petition does not challenge China's right to compete 
in the global economy on the basis of low wages. It is natural for a 
developing country with an excess supply of poorly educated rural 
workers to have low wages. We fully understand that even if China fully 
enforced its workers' rights, the wage gap between Chinese and American 
workers would not disappear. But it would surely narrow. The AFL-CIO 
challenge is specifically to the incremental cost advantage that comes 
from the brutal and undemocratic repression of workers' human rights. 
That increment is an illegitimate advantage under universal norms of 
human rights. And it is illegitimate under U.S. trade law as well.

                      THE BURDEN ON U.S. COMMERCE

    U.S. workers today have to compete with factory workers who are 
forced to work under lawless working conditions. And it is taking a 
toll. The manufacturing sector in the U.S. has been losing jobs for 43 
straight months. The U.S. has lost a staggering 2.8 million 
manufacturing jobs since early 2001.
    The AFL-CIO petition shows that China's violations of workers' 
rights gives Chinese manufacturers a cost advantage ranging between 10 
percent and 77 percent of overall production costs. We estimate that 
the illegitimate cost advantage displaces approximately 727,000 jobs in 
the United States.
    These are very conservative estimates. We used the most 
conservative assumptions to estimate the wage reduction that results 
from the Chinese government's repression of independent unions and its 
failure to enforce its own minimum wage laws. Then we applied the trade 
model used by the U.S. International Trade Commission to translate that 
figure into an impact on U.S. output, prices, and jobs.
    And the burden on U.S. workers goes far beyond the number of jobs 
lost. Twenty-five percent of displaced workers in the U.S. are still 
without a job six months after losing their jobs. Many of those who are 
fortunate enough to find new jobs suffer big losses of income, with 
two-thirds earning less on their new jobs. And these figures on lost 
wages are from the years before the bottom fell out of the labor market 
in the last three years, when it has become even more difficult to 
transition into decent-paying jobs.

                     CHINA'S MANUFACTURING CAPACITY

    While U.S. manufacturing workers have faced catastrophic losses, 
China's manufacturing output, exports, and productive capacity have 
grown at unprecedented, accelerating rates--and are poised to grow even 
more explosively in the next five years. It is much easier to keep jobs 
from leaving than it is to bring them back once they are gone. For this 
reason, the USTR should act now to prevent the imminent, irreversible 
loss of U.S. jobs due to China's illegitimate exploitation of its 
factory workers.
    Even though China is still in a relatively early stage of 
industrialization, it is already the second leading exporter to the 
United States, surpassed only by Canada. China's exports to the United 
States now exceed the exports of such industrial powerhouses as Japan, 
Germany, and the United Kingdom, and may soon surpass even Canada's. 
China's exports to the United States also exceed those of Mexico, the 
low-wage export platform immediately across our border.
    Unlike Mexico and other emerging export platforms, China has made 
``the crucial leap'' from assembly of electronic and other consumer 
goods for global and domestic markets, to manufacturing the components 
for those goods, including the fabrication of computer chips. Guangdong 
Province encompasses the largest such production base for electronics 
in the world.
    China now leads the world in the production of televisions, 
refrigerators, cameras, bicycles, motorbikes, desktop computers, 
computer cables and other components, microwave ovens, DVD players, 
cell phones, cigarette lighters, cotton textiles, and countless other 
manufactured products--and China's lead is growing at an accelerating 
pace.
    China's exports of textile and apparel goods have increased 320 
percent in the last two years, while U.S. employment in those sectors 
has fallen by 323,000. In the first eleven months of 2003, China's 
production of computers grew by 105.5%. Its production of micro-
computers grew by 84.9%, power-generating equipment by 72.5%, optical 
communication equipment by 54.3%, air conditioners by 43.2%, 
semiconductor integrated circuits by 38.6%, metal-cutting machine tools 
by 34.1%, motor vehicles by 33%, chemical equipment by 30.5%, fax 
machines by 30.2%, household refrigerators by 27.3%, household washing 
machines by 27%, cell phones by 24.5%, electric motors by 26.8% 
electric-driven tools by 26.2%, steel products by 21.5%, and plastic 
products by 17%. China's output of many manufactured products showed 
accelerating growth in the later months of 2003.China has now become an 
export powerhouse in high-tech computers and electronics and machine 
parts, not just low-tech toys and garments.
    But even while productivity rose rapidly in China in the last 
decade, the real wages of China's factory workers stagnated. The 
manufacturing boom in China has not been a train carrying China's 
workers into the middle class. China's workers can't bargain for higher 
wages because they lack basic workers' rights.

                           THE U.S. MUST ACT

    The President had 45 days from the date when the AFL-CIO filed its 
petition, March 16th, to decide whether to accept the petition and 
launch an investigation. If he denies the petition, he must state his 
reasons. He must declare either that China does not violate its 
workers' rights, or that China's violation of its workers' rights has 
no adverse effect on U.S. workers. Either declaration would contradict 
the overwhelming evidence presented in the AFL-CIO petition. Indeed, 
the President had authority under Section 301 to take action on his own 
initiative even without the AFL-CIO petition, but he has chosen not to 
do so. The only Section 301 case initiated by this Administration to 
date has been on intellectual property rights violations in the 
Ukraine.
    Section 301 authorizes the President to take any actions within his 
Constitutional powers to enforce fair competition and protect workers' 
rights overseas. The AFL-CIO petition asks that the President take 
three actions to remedy China's persistent denial of workers' rights:

          First, the President should impose trade measures against 
        China that are sufficiently large to induce China to enforce 
        workers' rights and to offset the unfair competition caused by 
        China's violations. The AFL-CIO is not asking for protectionist 
        barriers. If China enforces the basic workers' rights agreed by 
        the international community, then it can enjoy normal access to 
        U.S. markets, and it can create jobs that don't assault human 
        dignity.

          Second, in that non-protectionist spirit, the AFL-CIO asks 
        that the President negotiate an agreement with China to phase 
        out the trade measures in incremental steps, as China comes 
        into compliance with concrete workers' rights benchmarks--
        benchmarks that are specific and verifiable by the ILO, the 
        United Nations agency responsible for promulgating and 
        monitoring international labor rights.

          Third, the AFL-CIO asks that the President enter into no new 
        WTO agreements until the WTO incorporates enforceable core 
        workers' rights as a condition of WTO membership. It is 
        essential that workers' rights be protected throughout the 
        trading system, ideally through multilateral rules.

    Global rules should fairly enforce basic workers' rights--to ensure 
that global competition does not reward and encourage repression of 
fundamental human rights at the workplace. I thank you for your 
attention, and I look forward to your questions.

    Senator Brownback. Thank you very much, Ms. Lee, for bring 
this forward and addressing an issue that I care about a great 
deal in a different form and in a novel way.
    Mr. Bottelier, thank you very much for being here, welcome. 
And I look forward to your statement.

                 STATEMENT OF PIETER BOTTELIER,
                JOHNS HOPKINS UNIVERSITY (SAIS)

    Mr. Bottelier. Thank you, Mr. Chairman, and thank you for 
inviting me to participate in this panel. I will limit my 
comments to the specifics in the AFL-CIO petition, and I have 
not addressed the currency manipulation issue that you are 
interested in. Should you wish to address questions to me on 
that subject I'm ready to respond.
    Senator Brownback. Okay.
    Mr. Bottelier. Let me preface my comments by saying that I 
believe job losses to plant relocation and outsourcing 
certainly due to unfair trade practices are an extremely 
serious issue for the U.S. And I also believe that we cannot 
take it for granted that every job lost will be automatically 
replaced, even in a growing economy. However, blaming U.S. job 
losses to any significant degree on China's alleged repression 
of workers' rights is not going to get us very far. I do not 
believe that the repression of workers' rights in China--and I 
certainly do not deny all the facts in the AFL-CIO report--is a 
significant source of unfair cost advantage to many producers 
in China.
    The petition's conclusions on the measurement of job losses 
in the U.S. hinges critically on the estimate of the margin by 
which China's alleged persistent repression of workers' rights 
depresses Chinese wages below the level that would otherwise 
prevail. The petition estimates that Chinese wages would rise 
by 90 to 595 percent if there were no repression of workers' 
rights in China. I have at least three serious problems with 
that.
    First, the estimate of the underpayment, 90 to 595 percent. 
One absurd implication of this estimate is that if it were 
true, probably the majority of Chinese enterprises engaged in 
exports or even in local trade would have to disappear. These 
are margins so big they far exceed the profit margins of 
Chinese firms, which are typically very low. The implication of 
this allegation is that somehow these Chinese workers that 
would then not be employed would be better off in other 
circumstances.
    The second objection I have, Mr. Chairman, is that the 
petition assumes, without even raising the issue, that all 
these alleged cost advantages generated by the suppression of 
workers's rights are automatically passed on to the buyer; the 
buyer in the U.S. or the buyer elsewhere. That's an assumption 
that flies in the face, I would say, of logic. To the extent 
employers can succeed in pocketing that rent that they create 
that way, themselves, they would certainly do so. There is no 
reason to assume that automatically all cost advantages would 
be passed on to the buyer. And that's the basis of the case.
    The third point I wish to bring to your attention, Mr. 
Chairman, is that a share of Chinese exports to the U.S. is 
generated by U.S. companies located in China. There are no 
statistics on that. I personally estimate that somewhere 
between 12 and 15 percent of Chinese exports to the U.S. 
originate from U.S.-owned plants in China. Now, the petition 
doesn't mention that, but if the petition were to recognize 
that fact, it implies that the suppression of workers' rights 
is equally conducted by U.S.-owned plants in China, and that 
the U.S. would somehow need the cooperation of the Chinese 
Government to get U.S. companies in China to stop the 
suppression of those rights. That seems to be a rather absurd 
implication of the way the petition has been formulated.
    Finally, and perhaps somewhat philosophically, if I may, 
the petition does not really take into account that China is in 
a relatively early stage of development, sometimes in economics 
called the ``Lewis Phase of Industrialization.'' During that 
phase a vast number of rural workers remain outside the modern 
economy. In this respect China's current stage of labor market 
development is comparable to that of Britain in the Industrial 
Revolution and the U.S. in the 19th century. There were few, if 
any workers' rights in either country in those days. There's no 
reason to believe that free labor unions and the right to 
strike would improve average industrial wages in China today. 
The petition employs assumptions about the effect of 
independent unions and strike threats on wage levels that are 
not consistent with the realities in China.
    Finally, the estimates of the degree to which people are 
receiving less than they should in China are somewhat shaky and 
contradict, I think, other indicators. We know from many 
statements and statistics that the average standard of living 
in China, including rural people but more particularly urban 
people, is rising fast. The world has never seen a population 
increasing living standards on such a vast scale, so fast. This 
also leads to massive transfers of worker savings from the 
urban areas to the rural areas. Last year, according to the 
Chinese banking statistics, almost $40 billion of savings was 
transferred by urban migrant workers to their families in rural 
areas, almost nine percent more than the year before. Clearly, 
that is a significant source of income that could not have been 
transferred if urban wages are suppressed to a pure survival 
level.
    Another fact is that, according to my information, whereas 
all cities have different standards for minimum wages--and 
these are not laws, these are standards--they are enforced to 
varying degrees. In some areas, for example in Shanghai, the 
minimum standard is 570 RMB per month. My contacts in Shanghai, 
and these include private companies, tell me that Shanghai is 
pretty effective in enforcing the standards there.
    Another dimension I would like to mention, if you give me a 
second, is the suggestion that the underpayment of Chinese 
workers is somehow supported or condoned or at least abetted by 
the Chinese Government. This, I think, is a misstatement of the 
facts. It's clear that there are problems in China, 
particularly with regard to those migrants who enter the urban 
labor market for the first time; they have no negotiating 
power, but the average wages in China are, in fact, rising very 
rapidly. The abuses that do occur are recognized by the present 
government, both Prime Minister Wen Jiabo and President Hu 
Jintao have repeatedly stated that they want to end these 
practices and have invested a lot of political capital in 
trying to redress some of the problems.
    One final very brief comment on the so-called bondage of 
Chinese laborers through the hukou system, that is, the 
internal passport system. I believe that the report is 
seriously out of date. It quotes sources of many years ago. The 
hukou system in China is, in fact, on its way out; there is an 
official committee that is studying how it should be modified 
or abolished and in some areas of China it has officially been 
abolished already on an experimental basis.
    I'd like to leave it at that, Mr. Chairman. I'm ready to 
take your questions.

    [The prepared statement of Mr. Bottelier follows:]

                 Prepared Statement of Pieter Bottelier

COMMENTS ON THE AFL-CIO SECTION 301 PETITION AGAINST CHINA DATED 3/16/04

Conclusions:

  1. The economic analysis underlying the calculation of job losses in 
the U.S. due to China's alleged ``Persistent Suppression of Workers 
Rights'' is defective and deceptive.

  2. The suggestion that China's Government knowingly supports or at 
least abets the suppression of workers rights, so as to allow Chinese 
industries to gain unfair competitive advantage, is not adequately 
substantiated; there are important indications that China's Government, 
led by President Hu Jintao and PM Wen Jiabao is making serious efforts 
to combat such abuses of workers rights as do occur (other than the ban 
on strikes and the prohibition of independent unions).

  3. China's Government does indeed prohibit independent labor unions 
and generally does not permit labor strikes. These factors were known 
and understood at the time the U.S. negotiated the terms of China's 
entry into the WTO and the U.S. Congress passed the PNTR legislation in 
2001. If the U.S. had wanted to accuse China of unfair competition due 
to a ``Persistent Suppression of Workers Rights'' under section 301 of 
the 1974 Trade Law, it should have done so much earlier. If anything, 
labor conditions in China, though still very poor in many respects, 
particularly with regard to unskilled or semi-skilled rural migrant 
labor, are generally improving and in many industries better today than 
they were at the time China entered the WTO. The low pay of migrant 
labor is only one of many factors that keep production costs low in 
many manufacturing and service industries in China.

  4. The relentlessly negative picture of labor conditions in China 
presented in the petition is based on a selective use of data and 
sources; moreover, much of the information used is out of date.

  5. It would be more important and more productive for the U.S. to 
focus on other violations by China of fair trade rules and to approach 
the issue of job losses in the U.S. due to globalization in a 
different, more strategic way. There are many things the U.S. can do 
internally to make the economy more efficient and to lower production 
costs.

            1. The economic analysis is defective and deceptive.
          1. The petition's conclusions on job losses in the U.S. hinge 
        critically on the estimate of the margin by which China's 
        alleged ``persistent repression of workers' rights'' depresses 
        Chinese wages below the level that would prevail in the absence 
        of such repression. The petition estimates that local wages 
        would rise by 90 to 595 percent if there were no repression. 
        There are at least three problems with this:

                  (a) The estimate of ``under-payment'' is not 
                credible--most Chinese manufacturing industries/exports 
                would not be able to survive if they had to pay their 
                workers 90-595 percent more than they are paying now. 
                One absurd implication of this is that the bulk of 
                China's enterprises ought not to exist and that Chinese 
                workers, whose rights are being repressed, would 
                somehow be better off if these enterprises didn't 
                exist.

                  (b) The petition assumes, without questioning or 
                substantiation, that all of the production cost 
                advantages resulting from labor repression--estimated 
                at 10-77 percent--are always fully passed on to the 
                customer (local or foreign). Why would the seller do 
                this if he can keep at least part of the ``rent'' for 
                himself, as must be possible in some cases? If all or 
                part of the unfair cost advantages are pocketed by the 
                Chinese firm or its owner (often a local Government), 
                the petition's central argument is seriously 
                undermined.

                  (c) The petition makes no allowance for the fact that 
                U.S. companies operating in China account for an 
                estimated 12-15 percent of China's exports to the U.S. 
                Are those companies also violating Chinese workers' 
                rights? If they don't, the petition's calculations of 
                unfair cost advantages and associated job losses in the 
                U.S. need to be adjusted. If they do, another absurd 
                implication of the petition is that the U.S. Government 
                requires punitive duties on all Chinese exports to the 
                U.S. (and cooperation from China's Government) to get 
                U.S. companies in China to stop suppressing Chinese 
                workers' rights.

          2. The petition does not take into account that China is at a 
        relatively early stage (sometimes called the ``Lewis phase'') 
        of industrialization. During this stage a vast number of rural 
        surplus workers remain outside the ``modern'' economy. In this 
        respect, China's current stage of labor market development is 
        comparable to that of Britain during its industrial revolution 
        and the U.S. in the 19th century. There were few if any 
        ``workers' rights'' in either country in those days. There is 
        no reason to believe that free labor unions and the right to 
        strike would improve average industrial wages in China today. 
        The petition employs assumptions about the effect of 
        independent unions and strike threats on wage levels that are 
        not consistent with present labor market conditions in 
        China.\1\
---------------------------------------------------------------------------
    \1\ To illustrate this point two quotes from Upton Sinclair's, The 
Jungle (1906) describing the terrible conditions in Chicago's 
meatpacking industry and the ineffectiveness of labor unions at that 
time: ``She was in another canning factory and her work was to trim the 
meat of those diseased cattle that Jurgis had been told about not long 
before. She was shut up in one of the rooms where the people seldom saw 
the daylight; beneath her were the chilling rooms, where the meat was 
frozen, and above her were the cooking rooms; and so she stood on an 
ice-cold floor, while her head was often so hot that she could scarcely 
breathe. Trimming beef off the bones by the hundred-weight, while 
standing up from early morning till late at night, with heavy boots on 
and the floor always damp and full of puddles, liable to be thrown out 
of work indefinitely because of a slackening in the trade, liable again 
to be kept overtime in rush season, and be worked till she trembled in 
every nerve and lost her grip on her slimy knife, and gave herself a 
poisoned wound.'' ``Of course she stopped paying her dues to the union. 
She lost all interest in the union, and cursed herself for a fool that 
she had ever been dragged into one.''

          3. The petition's estimates of unfair cost advantages in 
        China due to the alleged non-observance of minimum wage 
        standards are shaky. Nobody seriously disputes that average 
        real incomes and living standards in China, especially in urban 
        areas, have improved dramatically over the past 20 years and 
        continue to rise at a rate that the world has rarely seen 
        anywhere, any time. How do we reconcile the petition's picture 
        of utter misery and Government-sanctioned bondage and 
        deprivation in China's factories with this? How do we explain 
        the RMB 374 billion that was transferred by urban migrant 
        workers to their families in rural villages in 2003 (8.7 
        percent more than in 2002) according to China's banking 
        statistics? Most Chinese researchers agree that real wages at 
        the very bottom of China's urban labor market--the point where 
        most urban migrants enter--have risen only very slowly or 
        stagnated at around RMB 500-600 p.m. for many years. No serious 
        researchers (Chinese or foreign) dispute, however, that average 
        real wages (and living conditions) for skilled and experienced 
        workers are improving, sometimes rapidly, in most urban areas, 
        and not only in factories owned by foreigners. The current 
        standard minimum wage in Shanghai (excluding overtime and 
        benefits such as lunch and transportation subsidy) is RMB 570 
        p.m. According to my sources, the minimum wage standard is 
        reasonably well enforced in Shanghai and in other big cities. 
        There are, moreover, many known and documented cases of Chinese 
        firms improving labor conditions for their workers in order to 
        be able to retain them or to attract better qualified people.
            2. Is China's Government condoning the repression of 
                    workers' rights?
          1. The petition either states or implies that China's 
        Government supports, condones or at least abets the repression 
        of workers' rights for economic advantage. This is a 
        misrepresentation of the facts. It is true that migrant workers 
        in China, especially those who are just entering the market, 
        are often subjected to abuse and discriminatory practices. (Is 
        the situation in the U.S. with regard immigrant labor from 
        Latin America any better?) It is probably also true that local 
        Governments in China are often aware of labor abuses when they 
        occur, but chose not to intervene, either because they benefit 
        from the situation, or because they are unable to correct the 
        problem. However, this is not Government policy. President Hu 
        Jintao and PM Wen Jiabao have both stated repeatedly that the 
        Government wishes to eliminate labor abuses and there is ample 
        evidence of efforts in this regard.

          2. The petition's characterization of China's ``internal 
        passport'' (hukou) system is out of date. Rather than using the 
        system for labor repression (bondage) as stated in the 
        petition, the Chinese Government is actively working to reform 
        the system. There is an official Government study group charged 
        with recommending policies how best to modify or abolish the 
        system (which, as the petition points out, dates back to the 
        Mao years). In several parts of Zhejiang (currently the 
        Province with the most advanced private enterprise development 
        in China) the hukou system was abolished on an experimental 
        basis last year. Many cities have begun to use the hukou system 
        as a fiscal revenue instrument instead of a labor control 
        instrument. The entire hukou system is likely to disappear in 
        the coming years and be replaced by a national ID card system. 
        The ID card system is already in use in some parts of China.

          3. Ironically, the petition asserts that the hukou system 
        artificially depresses wages in China. The opposite is more 
        likely to be the case. If the hukou system works the way the 
        petition describes it, namely by restricting the flow of rural 
        surplus labor to the cities, abolishing the system would 
        probably increase the supply of migrant labor and thus depress 
        urban wages.
            3. China's policy on independent labor unions and labor 
                    strikes.
          1. The petition has the facts right, but the interpretation 
        wrong. China is afraid that free labor unions could undermine 
        the (constitutional) power monopoly of the CCP (as happened in 
        Poland under Walesa's Solidarity movement in the 1980s) and 
        thus become a threat to social stability. However despicable or 
        deplorable one may find this Chinese perspective on the risk of 
        independent labor unions, it is China's reality today and the 
        U.S. knew all about this when it negotiated the terms for 
        China's entry into the WTO and when Congress passed the PNTR 
        legislation. The fundamentals of China's political system may 
        not change dramatically any time soon, but the dynamics of the 
        ongoing social and economic change processes, will undoubtedly 
        contribute to further improvements in average living standards 
        and in widening freedoms for the vast majority of its 
        population. Foreign enterprises operating in China account some 
        50% of China's exports. Many of these enterprises contribute 
        actively to the improvement of labor conditions in China.

          2. The petition's assumption that independent labor unions 
        and the right to strike would significantly improve wages and 
        other labor conditions in China (and thus reduce unfair costs 
        advantages) is not realistic as long as there are massive 
        numbers of rural surplus labor and urban unemployed (see 
        footnote 1).
            4. The petition's unqualified and relentlessly negative 
                    picture of labor conditions in China.
          1. I am sure that there are quite a few factories in China 
        that retain some or all of the terrible conditions for workers 
        as described in the petition. But, by not acknowledging or even 
        hinting, that the situation is highly variable between 
        industries and areas--and in any event changing, generally for 
        the better--the petition undermines its own credibility. The 
        petition presents evidence and data in a highly selective way. 
        Only the most ardent China critics--often people with little or 
        no real knowledge of the country--will accept the petition's 
        description of labor conditions in China without question.

          2. On some less important points, the petition is just plain 
        wrong. For example, on page 64 it states that ``Chinese 
        citizens have no alternative to depositing their savings in the 
        state-owned banks''. That was probably substantially true until 
        about ten years ago. Today Chinese citizens can and do own 
        stock, cars, houses, etc. and if they any savings left, they 
        can buy insurance or deposit them in many different banks. From 
        December 2006 they can also deposit their savings in foreign 
        banks in China if they wish, under WTO conditions. Chinese 
        citizens can also obtain passports for personal travel abroad 
        and take out foreign exchange for that purpose. The limits on 
        what may be taken out of the country for personal travel have 
        recently been increased significantly.
            5. Comments on China's unfair trade practices and job 
                    losses in the U.S.
          1. The ``repression of workers' rights'' in China is almost 
        certainly not a significant source of unfair cost advantage for 
        many producers in China. More important in my opinion are 
        China's lax enforcement of IPR and the pervasive counterfeiting 
        of both foreign and domestic products. Another way in which 
        some Chinese state-owned enterprises may gain unfair advantage 
        is through quasi-fiscal loans from state banks. Banking reform 
        has still not progressed to the point where all state 
        enterprises face genuinely hard budget constraints, like non-
        state enterprises. Completion of China's banking system reform 
        will probably take several more years. It is still possible for 
        some state enterprises in some situations to offload some or 
        all of their losses on state banks, thereby adding to the NPL 
        problem. To the extent they succeed in doing so, they may be in 
        a position to under-price their competitors unfairly. I think 
        that it would be more important and more productive for the 
        U.S. and other trading partners of China to focus on compliance 
        with WTO commitments that China has made regarding IPR 
        protection, legal system development and banking reform.

          2. Job losses due to globalization in general are undoubtedly 
        a serious issue for the U.S. and other rich countries--we 
        cannot take it for granted that every job lost will 
        automatically replaced by another one elsewhere in the economy. 
        Blaming U.S. job losses to any significant degree on China's 
        alleged repression of workers' rights, however, is not going to 
        get us very far. Opponents of the AFL-CIO Petition could argue 
        that U.S. production costs are unduly high, because of 
        excessive CEO compensation, enormous waste in energy use and in 
        the country's health care system, serious problems in public 
        education, etc. Addressing U.S. unemployment problems is going 
        to require a more strategic approach than what the AFL-CIO is 
        proposing in its Petition.

          3. I fully support efforts to improve occupational safety and 
        health standards (OSH) in all factories around the world, 
        through the WTO or otherwise. Unfortunately, after citing many 
        OSH horror stories in Chinese factories, the petition drops the 
        OSH issue in its final analysis on the ground that there is 
        empirical evidence to suggest that improved OSH standards may 
        be cost-neutral or even contribute to cost reductions over 
        time. If the AFL-CIO has the interests of Chinese workers at 
        heart, it should press the OSH standards issue, not drop it. 
        The petition is also silent on cost advantages that some 
        Chinese producers may enjoy as a result of inadequate 
        environmental controls. Again, I would support efforts by the 
        U.S. and by China's other trading partners to improve 
        environmental standards in China and their enforcement, even if 
        that in some cases leads to cost increases.

    Senator Brownback. Thank you very much for the very 
thoughtful comments that you put forward. The whole panel has 
been very good on an area that I've had a lot of questions 
about, so I appreciate the tutorial from each of you.
    Mr. Robinson, let me start with you on this. Do we know, or 
do you know what percent of total foreign investment going to 
developing countries goes to China? In other words, of the 
whole global Foreign Direct Investment (FDI), or maybe Dr. 
Waldron, if you know this number, how much of it's pouring into 
China versus going to Honduras, other developing countries? Do 
we know that number?
    Mr. Waldron.  I don't know the number but I do seem to 
recall a news item a while ago saying that China had overtaken 
the United States as the most-favored destination for 
investment. We can get that number, certainly.
    Mr. Bottelier. I don't know it, Mr. Chairman, precisely, 
but let me answer by saying, the number varies from year to 
year. China has come on extraordinarily strong as a recipient 
of FDI in the last few years and, as Mr. Robinson mentioned, 
received more FDI than the United States last year, and this 
year, probably. My guess is that the total amount of FDI 
flowing to developing countries--we have to distinguish between 
Europe, United States, Japan--that China would probably receive 
about a quarter, at least a quarter at the present time.
    Ms. Lee. A lot more than that.
    Senator Brownback. I want to focus in on the developing 
countries because here's the thought that I'm working with on 
this, is that you've got a global economy that's clearly 
integrating very, very rapidly. I mean, it moves and it moves 
rapidly and capital moves. But China has become such a great 
suction for Foreign Direct Investment that it has significant 
impacts on that score throughout the developing world in quite 
a profound way.
    Mr. D'Amato. There's no question, Mr. Chairman, that China 
is exceeding the net in-flow from developing countries because, 
for example, we're worried about Mexico ceding its textile 
advantage to the Chinese because of China's lower labor costs 
coming up, that if the multi-fiber agreement does end on time, 
this year, that the chances of most of the countries of Asia 
losing textile share to China will be apparent. So it looks 
like the in-flow of FDI into China is exceeding, you know, most 
of that that's going to the rest of the developing world.
    Mr. Robinson. I would just chime in, Mr. Chairman, that the 
number's about $50 billion, and that sucking sound you hear in 
your mind is real. This is the largest flow of Foreign Direct 
Investment on the globe, I believe. Now, what percentage it is 
of the developing world, we'll take a look at that and be back 
to you on it. But leave it to say that this has got to be 
having a deleterious affect on some of these other emerging 
market economies that I think you're getting to.
    Senator Brownback. I'm getting to that and plus, this is 
about two years ago, I did a trip through India and China, and 
I was just comparing those two countries' Foreign Direct 
Investment, and India was a paltry amount relative to what 
China was. Now, I think India's has been growing substantially 
the last couple of years, but it still has not been in 
comparison to China. And then, I started to hear now from 
Central American countries saying this thesis: Look, we engaged 
democracy and open societies ten, 15 years ago, and we aren't 
living any better today than we were ten or 15 years ago. Why? 
What's happening here? Well, it appears as if, you know, while 
we were saying yes, you should do that and you've got to open 
the society and create systems where you can grow, but that 
China is pulling so much of that in that we're just not seeing 
that spread much anywhere around the world.
    Mr. Waldron. Could I just add, I think one of the things 
that troubles me the most about this is that China has what is 
euphemistically described as a disciplined workforce. And she 
is competing with lots of countries, new democracies, where 
workers actually have rights. Now, the sad fact is that most 
investors are quite happy to have a disciplined workforce. They 
don't want strikes. They're quite happy if the secret police 
takes away somebody who's making trouble. They will supply all 
sorts of rationalizations, but the real point is that it's much 
easier to do business in a certain type of dictatorship than it 
is in a democracy. Yet it's overwhelmingly in the interest of 
the United States that we should support other democracies with 
trade, with investment, and so forth. And I think the 
administration and the government should think very, very 
seriously about how to do this.
    One of my colleagues at Penn, who is a law professor, said 
that he expects, within ten or 15 years, that the issue of 
workers' rights will become an integral part of international 
trade law. And if that should happen then this very, very 
worrying issue would begin to be addressed. But I do think, as 
an American, that it is terrible to see countries that have 
made the sacrifices and taken the risks to become democratic 
and to give their workers rights then lose out in the 
competition for foreign capital to countries having these 
workforces which are basically under police supervision.
    Senator Brownback. Mr. Bottelier, respond to that thought. 
I would ask, what are your thoughts about that?
    Mr. Bottelier. Okay. May I preface that, Mr. Chairman, by 
just one more comment on these FDI numbers? I think it's 
important. China is indeed a huge absorber of FDI. Number one 
comment that I would like to make, that China now has also 
become a large source of outgoing FDI. It's the largest amongst 
developing countries of outgoing FDI, that few people have 
focused on. Secondly, in the 80s and the early 90s, 60 to 70 
percent of all the FDI going in China came from overseas 
Chinese, mainly Hong Kong, Taiwan, Thailand, Indonesia. Even 
today, about half of the FDI going into China is from overseas 
Chinese. Furthermore, to qualify the numbers, it is estimated 
that perhaps 20 to 30 percent of the total FDI going into China 
is in fact Chinese money that is being recycled through Hong 
Kong or the United States in order to take advantage of certain 
privileges extended to foreign investment rather than domestic 
investment.
    Senator Brownback. Good, good, excellent point.
    Mr. Bottelier. The number is a bit more. And finally, 
perhaps the most important point, a lot of FDI goes to China 
because the domestic financial intermediation in that country 
is still so undeveloped that bank loans tend to be not easily 
available to private enterprises or non-state enterprises. Most 
of them still go to state enterprises and now increasingly 
mortgages. Once the domestic banking system and the stock 
exchanges and the bond markets develop, then you will see that 
there is much less need for foreign investment money to sustain 
the same level of investments. The FDI record levels partly 
reflect defective domestic financial intermediation.
    Senator Brownback. Mr. Bottelier, though, respond to the 
comment that China's disciplined workforce is one that gives it 
an advantage over a democratized Central or South American 
workforce?
    Mr. Bottelier.  Well, I think the discipline to which Mr. 
Robinson referred is probably an element but less and less so. 
The Chinese labor force is, by Asian standards, East Asian 
standards and South Asian standards, a disciplined labor force 
in the sense that the people are well trained, Chinese workers 
are generally very literate, have relatively high health 
standard; this is a long tradition, their life expectancy is 
higher than in most Asian countries and the Chinese are 
extraordinarily industrious people.
    Ms. Lee. Oh, please.
    Mr. Bottelier. And entrepreneurial people. I'm not an 
advocate for China here, but we should realize that there's 
more to China than cheap labor. Another factor which is now 
beginning to play a significant role is the relationship 
between all these foreign investments located in China. It is 
the intra-China supply lines that allow newcomers to reduce 
their costs, not only because labor is good and cheap but 
because everybody else is there. So intra-China supply lines 
between manufacturing industries allow cost advantages that 
other developing countries, with far less foreign investments, 
don't have.
    Senator Brownback. Ms. Lee?
    Ms. Lee. If I may just say, I think it's really an insult 
to talk about workers in China as industrious and hard working 
as opposed to oppressed. Of course they're industrious and hard 
working and of course they're good workers and they're smart 
and so on, but the reason that foreign investment floods to 
China is a combination of many factors, including other kinds 
of commercial advantages, a large marketplace, and so on, but I 
think you cannot underplay the level of oppression in China. 
You said you don't challenge the facts that are in the petition 
that the State Department has documented. I just think it's 
really appalling to talk about the advantages of Chinese labor 
in terms of level of hard work. Workers in China are denied 
their basic human rights. They're not allowed to form unions. 
They're not allowed to even advocate for unions. They're not 
allowed, in some cases, to even ask for the wages that they're 
due, and they're treated abominably both by their employers and 
by their own government. And I challenge many of the arguments 
you make. I'm surprised, Mr. Bottelier, to hear your critique, 
and I guess I'm wondering what the implication is, whether 
you're saying that there's no wage advantage whatsoever that 
comes from the denial of workers' right of freedom of 
association, the failure to enforce minimum wage and hours of 
work and health and safety laws, or are you saying that the 
particular estimate that we have is too high? We can talk about 
what the particular estimate is, but to say that there's no 
advantage whatsoever, there's no cost advantage, I think 
threatens credibility because then you have to ask the 
question, why is it that companies don't pay decent wages? Why 
is it that the Chinese government by law prohibits unions from 
forming, prohibits workers from exercising their rights? And is 
there no economic advantage whatsoever to doing that? I find 
that very, very hard to believe, and I'd be surprised if that's 
really the argument that you're making.
    Mr. Waldron. Could I just second what Ms. Lee has said? I'm 
really ashamed to hear American spokesmen or business spokesmen 
gloss over the fact that China is now one of the most 
repressive countries in the world and their labor force is 
certainly under very close observation and supervision. And my 
own view is that we need something like the Sullivan Principles 
that we applied to South Africa to regulate the activities of 
American business there with respect to the treatment of labor. 
And I would add, of course, on another point that the 
activities of American business in facilitating the development 
of the Chinese military industrial complex have also been a 
very serious problem. But to run through a list of how hard 
working, industrious, healthy and so forth the Chinese workers 
are while suggesting that somehow they have no awareness they 
are oppressed is simply wrong. We all know any number of union 
leaders who have been arrested. We know that there is strong 
labor awareness, and we also know that the Chinese secret 
police cracks down on this very, very hard.
    Senator Brownback. It's a tough topic. Ms. Lee, let me ask 
you a question that I had a gentleman pose to me this morning, 
if the administration agrees with proceeding forward with the 
301 case, and hearing it, that we will not get support 
internationally in the developing world because many people in 
the developing countries will say, well, that may be China now, 
but we're going to be next, and it will be about our not having 
the same worker wages or rights in our area as they do in the 
United States so we're not going to support you on step one 
because we think we're step two or three down the road. How do 
you respond to that?
    Ms. Lee. Well, that's a really interesting question. I 
don't know the answer at the moment because we haven't had 
official conversations with governments in developing countries 
on this specific issue. What we have had is conversations with 
unions in developing countries around this issue, and with the 
International Confederation of Free Trade Unions (ICFTU), which 
is the international labor body which we belong to. ICFTU 
represents about 150 million workers worldwide, about two-
thirds of whom are in developing countries, and it has been 
very supportive of our workers' rights petition. Most of what 
we hear from unions in developing countries is that they are 
terrified competing with China. They're very supportive of an 
action that would, in fact, challenge China to be more 
democratic, to respect basic ILO core labor standards, to bring 
its laws into compliance with international standards. So 
certainly workers in developing countries have a keen 
understanding of the same exact kind of challenges that 
American workers are facing. They're losing their jobs to China 
because China's not a democracy, because China violates human 
rights. We'd like to see some of their governments, we 
certainly will be in contact, more specific contact with our 
union counterparts in developing countries and also in 
industrialized countries to see if we can get them to lobby 
their governments to support the petition.
    Senator Brownback. Have any come forward yet to support, in 
any developing countries?
    Ms. Lee. We haven't had that specific conversation yet at 
this time. But we expect that there will be some support 
internationally because even in Cancun, at the last WTO 
ministerial meeting, many trade union representatives, 
including myself, met with some developing country governments, 
most of whom were fixated on the problem, the challenge of 
competing with China, particularly in 2005 when the textile and 
apparel quotas are scheduled to be lifted. And there were 
governments in Africa and the Caribbean that were very, very 
concerned what the competitive impact on them would be, and 
they were more interested in talking to us about workers' 
rights provisions in the WTO than they've ever been in the 
past.
    Senator Brownback. I haven't been a fan, historically, of 
labor agreements as part of trade agreements. I've always felt 
like these are things that should be separated. Yet what I'm 
seeing develop is a constellation of issues, particularly 
focused on China, that just makes me increasingly concerned 
with it, so that I'm looking aghast and saying what else? How 
else should we address this set of issues? And maybe it all 
works through. I'm hoping for that, that it all works on 
through, but I'm been hoping for that for a number of years 
now, and I haven't seen anything. And so that's why I'm 
wondering if we're going to have to take other actions that 
maybe previously had not been thought of for the issues of 
addressing China, but also for addressing equality and 
democratization issues around the world that we're running into 
our own rhetoric in places where we ought to be able to stand 
up and say, you do this and life does improve.
    Mr. Bottelier, you present some very sound, I think, 
arguments on some of these things, as well. I mean, like once 
you get a concentration in China it tends to grow; when if you 
don't have that same concentration in other places, it would 
have less ability to attract the capital, and so I respect the 
thought and the fundamental economic forces. There are a set of 
very big issues here that are circling around China, and much 
of it, I think, could be resolved if they would embrace 
democratization, if they would embrace human rights. And then, 
you know, guys like me would let up and say if that's the way 
the market's going to compete, it will compete, and we're all 
going to compete fairly in it. It just doesn't seem like that's 
what's taking place. And then the product of our policy 
decisions, or lack of policy decisions, then grows and its 
importance and our options lessen as the years move forward. I 
think Mr. Robinson was saying we may have about ten years to 
really influence China and its direction and pass that. The 
engine has enough fuel on its own to do what it chooses to do 
at that point in time.
    I want to thank you all for being here and for hanging in 
through this. I would invite each of you, if you have 
particular policy thoughts that you think we should be putting 
forward to implement some of the ideas that you're putting 
forward, to get them to us.
    Dr. Waldron, you mentioned the Sullivan Principles. Mr. 
Robinson, I thought you really put your finger on the issues. I 
didn't hear with the same clarity okay, do this, this and this 
afterwards.
    I think, Ms. Lee, I understand clearly your point of view 
is certify the case, would be it.
    And Mr. Bottelier, if you see items that we should move 
forward with, let us know as well.
    This is an area of growing concern, policy-wise. It's a 
growing concern politically across the country. The nation 
knows that we are heavily dependent upon China, and we're 
getting cheap goods from there, but they don't like it. They 
don't particularly like that set up.
    And while the outsourcing issue is getting a lot of play as 
well, as it should, I think it needs some real good economic 
examination as to the actual outsourcing/insourcing issue. It 
still reflects more of an internal, deeper feeling, like we're 
just too dependent upon a place that's just not structurally 
the way we think it should be. And not stable structurally, 
when you're ruled by a small party elite that has the ability 
to move rapidly in unpredictable fashions, and that's a 
discomforting thing to many, many of us.
    Mr. D'Amato.
    Mr. D'Amato. I just wanted to say, Mr. Chairman, the 
commission will have its report for you in about a month, and 
it will have a lot of very specific recommendations and things 
we think the Congress ought to be doing to take a look at these 
issues and to move to the Executive Branch as well, down the 
road. Because we do think that leverage is important here. The 
Chinese do respond to leverage but leverage has got to be 
strong, sustained.
    Senator Brownback. And real.
    Mr. D'Amato. And real, absolutely. And that's what's going 
to have to make the difference. But those are the 
recommendations that we will be providing for you.
    Senator Brownback. Yes, it's not a jawboning process. This 
is playing with real dollars here and real lives, and we have 
to make it substantial and direct and felt for action to occur.
    Mr. D'Amato. Right.
    Senator Brownback. Thank you. Thank you all very much for 
attending.
    The hearing is adjourned.

    [Whereupon, at 4:19 p.m. the hearing was adjourned.]


                            A P P E N D I X

                              ----------                              



Responses to Questions for the Record Submitted to Assistant Secretary 
              Lorne W. Craner by Senator Russell Feingold

    Question. The Congressional Executive Commission on China stated in 
their 2003 annual report that ``working conditions and respect for 
worker rights in China were frequently in violation of China's own 
laws, especially those governing wages and overtime pay, work hours and 
overtime hours, and workplace health and safety.'' What are the 
obstacles to the enforcement of China's own laws? What steps are you 
taking to encourage China to both enforce its existing labor laws and 
expand worker protection?

    Answer. The 2003 annual human rights report noted ``widespread 
official corruption and efforts by local officials to attract and keep 
taxpaying, job-producing enterprises that might otherwise locate 
elsewhere undercut enforcement of the minimum wage provisions.'' There 
are national laws governing working hours, but these laws are often not 
enforced, particularly in private enterprises that can rely on a vast 
supply of low-skilled migrant labor. A Work Safety Act was enacted in 
2002 and nearly 70 field offices of the State Administration for Work 
Safety exist throughout the country, but enforcement is the 
responsibility of lower-level governments and is weak. The absence of 
genuinely representative trade unions exacerbates this state of affairs 
by depriving workers of a powerful voice that could defend their rights 
in the workplace.
    The U.S. Departments of State and Labor are funding projects in 
China totaling approximately $10 million to improve labor laws, 
strengthen their enforcement, raise labor awareness, provide legal aid 
to workers, and improve mine safety and health.


    Question. It has been reported that much of the labor abuse occurs 
in foreign-owned factories in China's coastal provinces. News reports 
discuss how factory managers hold two accounting books--one reflecting 
the reality of the factory and one book, which distorts the hours and 
workplace conditions to show their foreign clients. What should be done 
to pressure the Chinese government and foreign companies to monitor 
their factories more closely to ensure that labor codes of conduct are 
being followed? Can more be done to encourage companies operating in 
China to prioritize labor conditions?

    Answer. The U.S. Government is committed to supporting socially 
responsible business practices and encouraging good labor practices in 
China. The U.S. Departments of State and Labor are funding projects in 
China totaling approximately $10 million to improve labor laws, 
strengthen their enforcement, raise labor awareness, provide legal aid 
to workers, and improve mine safety and health. Projects to foster 
socially acceptable practices are being carried out by organizations 
selected through open competition.
    In March, representatives of major international buyers in the 
footwear and apparel industry met with our Ambassador in Beijing to 
discuss ways to improve enforcement of labor law in their Chinese 
supply chains. The Ambassador said he would raise their concerns in his 
own meetings with Chinese government officials. We are exploring 
holding a national conference on socially responsible practices in 
China in the near future.


    Question. According to recent news reports, the People's Republic 
of China continues to assert that they will set the pace of reform in 
Hong Kong on their own schedule. Democracy activists believe that 
Beijing is gradually reneging on their guarantee of broad autonomy and 
that their demands for direct elections are being dismissed. What 
leverage will you use to pressure the Chinese government to respect the 
political rights of the people of Hong Kong?

    Answer. It is longstanding United States Government (USG) policy 
that the Hong Kong Government should move toward greater 
democratization, through electoral reform and universal suffrage, as 
provided for in the Basic Law. We were deeply disappointed by the 
recent National People's Congress decision that effectively ruled out 
the possibility of universal suffrage for the Chief Executive in 2007 
and the Legislative Council in 2008. This decision does not adequately 
reflect the strongly expressed wishes of the Hong Kong people for 
universal suffrage and democratization and threatens to undermine the 
high degree of autonomy guaranteed to Hong Kong in the Basic Law.
    We will continue to support electoral reform and universal suffrage 
in Hong Kong, in keeping with the Basic Law's own goals. Hong Kong 
Consul General James Keith, Ambassador Clark Randt and other senior USG 
officials regularly express our views on this issue, stressing that 
international confidence in Hong Kong is predicated on its rule of law 
and high degree of autonomy. Vice President Cheney made this point to 
his counterparts during his April trip to China. In the months ahead, 
the United States will continue to monitor the situation in Hong Kong 
with the goal of supporting Hong Kong's democratization process.


    Question. China has recently suspended its human rights dialogue 
with the United States following a proposed UN resolution by the Bush 
Administration that criticized China's human rights practices. How can 
we continue to make progress on these issues dispite this Chinese 
action?

    Answer. Since the defeat of China's no-action motion in 1995 and a 
close vote on the resolution itself, the Chinese have equated 
sponsorship of a China resolution at the United Nations Commission on 
Human Rights with ``confrontation'' and suspended the U.S.-China Human 
Rights Dialogue in retaliation. We were not surprised that they did so 
this year, but felt that China's backsliding on human rights in 2003 
fully warranted bringing up China's human rights record before the 
world's preeminent human rights forum.
    Key human rights issues are being raised in channels other that the 
Human Rights Dialogue by senior officials. for example, Vice President 
Cheney raised human rights concerns during his April trip to Beijing.
    We have already begun to press China to resume the dialogue, 
pointing out that it is China's own strongly held and often expressed 
view that dialogue, not ``confrontation,'' is the most effective way to 
resolve differences on human rights. We are hopeful that China will 
agree to resume the dialogue sometime later this year. We are also 
making the point to Chinese officials that only progress made as a 
result of dialogue will denable us to forego an resolution next year 
and that resuming the dialogue is in both of our interests.

           Prepared Statement of Senator Russell D. Feingold

    I would like to thank Senator Brownback for convening this 
important hearing on the status of reforms in China.
    Sadly, evidence of positive human rights reforms is sparse. Despite 
U.S. pressure on the Chinese government, it appears that the human 
rights situation continues to deteriorate. Refusing to distinguish 
between peaceful and violent dissent, the Chinese government punishes 
those who dare to speak out for political and civil rights, and works 
to silence those demanding basic labor rights.
    A flurry of press reports have documented China's labor conditions, 
and revealed a persistent and widespread suppression of labor rights in 
China. China's labor activists continue to be accused of ``subversion 
of the state'' and to be imprisoned, tortured and beaten by 
authorities. Too many Chinese workers suffer from inhumane working 
conditions, confronting gas explosions, mine flooding, and toxic fumes 
at work, and laboring at machinery without proper safeguards in their 
workplaces. They have no national minimum wage or overtime pay, nor do 
they have the ability to seek recourse for these injustices. While the 
Chinese Constitution ostensibly provides for freedom of association, 
Chinese workers in practice are not free to organize or bargain 
collectively.
    Wisconsin alone has lost approximately 80,000 manufacturing jobs 
since 2002, many of which have moved to China. There is a growing 
consensus in my state that abysmal labor conditions in China are 
creating an impossible playing field, one where U.S. workers cannot 
compete, and should not compete. The Chinese government's unwillingness 
to check these labor abuses appear to be undermining our own 
manufacturing base in Wisconsin.
    In addition to problems with labor rights, the People's Republic of 
China continues to violate the political and civil rights of its 
citizens. The state refuses to allow the people of Hong Kong to elect 
their own representatives despite the overwhelming support for direct 
elections, and continues to persecute the ethnic Uighurs and Tibetans, 
repressing all political, religious and cultural expression.
    When it comes to these fundamental human rights issues, where is 
the reform? Where is the progress? What more can Congress do? I look 
forward to the panelists' insights on how the U.S. government can play 
a greater role in encouraging reforms in China.

                                 
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