[Senate Prints 110-46]
[From the U.S. Government Publishing Office]


110th Congress 
 2d Session                 COMMITTEE PRINT                     S. Prt.
                                                                 110-46
_______________________________________________________________________

                                     


 
                       CHINA'S FOREIGN POLICY AND

                    ``SOFT POWER'' IN SOUTH AMERICA,

                            ASIA, AND AFRICA

                               __________

                                A STUDY

                            PREPARED FOR THE

                     COMMITTEE ON FOREIGN RELATIONS

                          UNITED STATES SENATE

                                 BY THE

                     CONGRESSIONAL RESEARCH SERVICE
                          LIBRARY OF CONGRESS

                                     



                            APRIL 2008



      Printed for the use of the Committee on Foreign Relations

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                COMMITTEE ON FOREIGN RELATIONS          

           JOSEPH R. BIDEN, Jr., Delaware, Chairman          
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin       NORM COLEMAN, Minnesota
BARBARA BOXER, California            BOB CORKER, Tennessee
BILL NELSON, Florida                 GEORGE V. VOINOVICH, Ohio
BARACK OBAMA, Illinois               LISA MURKOWSKI, Alaska
ROBERT MENENDEZ, New Jersey          JIM DeMINT, South Carolina
BENJAMIN L. CARDIN, Maryland         JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
JIM WEBB, Virginia                   JOHN BARRASSO, Wyoming
              Antony J. Blinken, Staff Director          
       Kenneth A. Myers, Jr., Republican Staff Director          

                                  (ii)


                            C O N T E N T S

                              ----------                              
                                                                   Page

               China's Foreign Policy and ``Soft Power'' 
                   in South America, Asia, and Africa

Letter of Submittal..............................................     v

Letter of Transmittal............................................   vii

China's ``Soft Power:'' Overview and U.S. Policy Challenges......     1

    Definitions of Soft Power....................................     2

    Presumed PRC Foreign Policy Goals............................     4

    Competitive Advantages of PRC ``Soft Power''.................     9

    Limitations on PRC ``Soft Power''............................    10

    Implications for U.S. Interests..............................    12

    Options......................................................    13


Latin America and the Caribbean..................................    16

    Overview.....................................................    16

    Diplomacy....................................................    16

    Economic Ties................................................    20

    Foreign Assistance...........................................    26

    Implications for U.S. Policy in Latin America and the 
      Caribbean..................................................    28


The Southwest Pacific............................................    32

    Overview.....................................................    32

    Diplomacy....................................................    33

    Trade and Investment.........................................    36

    Foreign Aid..................................................    37

    Pacific Views Toward China...................................    38

    Implications for U.S. Policy in the Region...................    40


Japan and South Korea............................................    42

    Overview.....................................................    42

    International Trade Flows....................................    42

    Investment, Financial, Aid, and Cultural Flows...............    45

    China's Relations With Japan.................................    51

    China's Relations With South Korea...........................    54

    Regional Trade Arrangements..................................    58

    Implications for U.S. Policy in the Region...................    63


Central Asia.....................................................    65

    Overview.....................................................    65

    Bilateral and Multilateral Diplomacy.........................    66

    Economic Ties................................................    71

    Foreign Assistance...........................................    78

    Implications for Central Asia................................    79

    Implications for U.S. Interests..............................    83


Southeast Asia...................................................    88

    Overview.....................................................    88

    Diplomacy....................................................    89

    A Comparison of U.S. and Chinese Economic Relations With 
      ASEAN......................................................    91

    Foreign Aid..................................................    97

    U.S. Policy Implications.....................................   101


Sub-Saharan Africa...............................................   105

    Overview.....................................................   105

    China's Current Africa Policy................................   107

    PRC ``Aid'' and Trade Finance in Africa......................   113

    China-Africa Trade and Investment............................   119

    Sino-African Engagement: Implications........................   125



                          LETTER OF SUBMITTAL

                              ----------                              

                                                    April 15, 2008.
Hon. Joseph R. Biden, Jr., Chairman,
Committee on Foreign Relations,
 United States Senate, Washington, DC 20510.

    Dear Mr. Chairman: In response to your request, I am 
submitting a comprehensive memorandum examining the People's 
Republic of China's (PRC's) activities and ``soft power'' 
projection in Asia, Africa, and Latin America. The work was 
prepared by members of CRS's Foreign Affairs, Defense, and 
Trade Division. My understanding is that you may distribute the 
memorandum as a committee print.
    The study addresses the questions you posed when you first 
asked us to prepare a lengthy study of the topic: How much is 
China really doing in these regions, and how much do we know 
about its motivations? What do these widespread PRC activities 
mean for the United States and for U.S. global influence: are 
the implications necessarily bad and therefore a demonstrable 
threat to U.S. interests across the board, or might the 
implications be benign or in some instances even positive for 
U.S. interests? How has this increasing engagement affected 
China's own policies? Finally, what are the economic and 
political costs and benefits to China of such international 
engagement, and are they likely to be influences for greater 
pragmatism and nuance in PRC policies or serve instead to 
reinforce more hardline and nationalistic sentiments?
    The study opens with an overview section discussing China's 
presumed foreign policy goals, the attractions and limitations 
of China's ``soft power,'' and the implications and options for 
the United States. The memorandum proceeds to an analysis of 
China's relations with countries in Latin America and the 
Caribbean, the Southwest Pacific, Japan and South Korea, 
Central Asia, Southeast Asia, and Sub-Saharan Africa.
    Kerry Dumbaugh, CRS Specialist in Asian Affairs, 
coordinated the study, developing its framework, overseeing the 
work of the eight other contributors, and writing the overview 
section. Specialist in Asian Affairs Thomas Lum assisted in 
overseeing the project. Other authors were CRS analysts Nicolas 
Cook, Wayne Morrison, Dick Nanto, Jim Nichol, Mark Sullivan, 
and Bruce Vaughn. Information research specialist Susan Chesser 
provided assistance obtaining data. Asian affairs analysts 
Shirley Kan and Michael Martin provided in-depth peer review. 
Jared Nagel, of CRS's support staff, provided invaluable 
administrative assistance.
            Sincerely,
                             Daniel P. Mulhollan, Director.

                                     

                         LETTER OF TRANSMITTAL

                              ----------                              

                              United States Senate,
                            Committee on Foreign Relations,
                                    Washington, DC, April 29, 2008.
    Dear Colleague: China's emergence as a global power has 
profound implications for the security and economic interests 
of the United States. The pace and scale of China's development 
is unprecedented, and poses a host of issues that have made 
China the image of globalization in the minds of the American 
public. Yet for all of the attention being paid to China's rise 
and its attendant economic, environmental, security, and 
political consequences, the United States still has a very 
imperfect understanding of China's power and motivations or how 
the rest of the world is responding to China's integration. The 
debate in our country over how best to respond to China can 
quickly become polarized between those who view China 
principally as a threat and those who see China's rise as 
essentially benign. The truth is that China's rise presents 
both challenges and opportunities for the United States.
    Last year I asked the Congressional Research Service to 
prepare a comprehensive report examining China's growing ``soft 
power'' in Asia, Africa, and Latin America. Harvard professor 
Joseph S. Nye, Jr. first argued in 1990 that the United States 
must wisely deploy its soft power--the non-military tools of 
our foreign and national security policies--to complement its 
``hard power,'' or military force, if it is to advance its 
interests in the era of globalization. He and others have since 
refined this original concept and have testified before the 
Committee on Foreign Relations on the application of ``smart 
power'' to address the challenges confronting the United States 
in the 21st Century. My objective in requesting this study was 
to provide the Congress with a better factual understanding of 
China's use of soft power, including: international trade and 
investment, development assistance, cultural influence, 
humanitarian aid, travel and tourism. CRS has produced an 
analysis that not only takes stock of China's soft power, but 
also illuminates the options open to the United States to 
respond to China's ``invigorated activities around the world.''
    Pulling together a distinguished group of China specialists 
and other regional and functional analysts, CRS delved deeply 
into China's foreign policy and soft power, examining both the 
strengths and weaknesses of China's approach to the world, and 
the benefits and drawbacks for those countries most closely 
integrated with China's growing economy. On the plus side, CRS 
reports that China's involvement in Africa is spurring 
investment, `` . . . in infrastructure and the financial 
services, manufacturing . . . and market niches that non-
Chinese foreign investors have generally long ignored.'' China 
provides the developing world access to cheap credit and 
inexpensive consumer goods, and many countries are enjoying 
rapidly rising revenues due to Chinese demand for their 
exports. On the other hand, China's manufacturing strength 
makes it difficult for industries in the developing world to 
gain a competitive advantage, putting some out of business. And 
China's investment in developing economies, particularly in 
natural resource extraction, sometimes undermines international 
efforts to link aid and investment to measurable progress by 
recipient countries in combating corruption, improving 
transparency, and respecting human rights. In Uzbekistan, for 
example, CRS reports that U.S. criticism of human rights 
conditions may have spurred Uzbekistan to re-evaluate its ties 
with the United States and to improve its ties with China.
    China has attempted to exploit its ``no strings attached'' 
foreign aid stance and its ability to deploy state-owned assets 
to reap soft-power advantages. But CRS finds that China's 
success has been mixed and its influence remains modest. 
Contrary to some projections of China's ability to displace 
American influence through the use of soft power, the CRS 
report indicates that China must grapple with many limitations 
on its influence. As China has become more engaged in world 
affairs, it has also discovered that its foreign entanglements 
may not always be popular at home or abroad. In some cases, 
Chinese economic engagement has become the subject of intense, 
xenophobic political debate, as in the Zambian election of 
2006, when the main opposition candidate incited his followers 
with vitriolic anti-Chinese rhetoric. And CRS found that 
China's cumulative stock of foreign direct investment (FDI) 
worldwide amounted to just $73.3 billion at the end of 2006--
0.58% of global FDI. Moreover, CRS found that China's soft 
power achievements are built on a very narrow base, confined to 
non-controversial issues where all sides are most likely to 
agree. And even in those areas--such as disaster relief--
China's level of effort and its accomplishments pale beside 
those of the United States. Finally, while China's state-owned 
assets may be obedient to state authority, CRS found that 
America's private sector leaves a ``substantial global 
footprint,'' sometimes overlooked by those comparing only 
government directed overseas initiatives.
    It is my hope that this study will inform debate about 
China and help point the way toward policies that will not only 
respond to those Chinese actions that are at odds with U.S. 
interests, but will also build on the many common interests 
created by China's enhanced integration with the international 
community. In the weeks ahead, the committee will conduct 
hearings examining U.S.-China relations, China's use of soft 
power, and the opportunities for the United States to 
reinvigorate its own ``smart power'' by engaging China to work 
with us to advance our common interests.
            Sincerely,
                            Joseph R. Biden, Jr., Chairman.


 China's Foreign Policy and ``Soft Power'' in South America, Asia, and 
                                 Africa

                              ----------                              


     China's ``Soft Power:'' Overview and U.S. Policy Challenges\1\
---------------------------------------------------------------------------

    \1\ Prepared by Kerry Dumbaugh, Specialist in Asian Affairs, 
Foreign Affairs, Defense, and Trade Division, Congressional Research 
Service.
---------------------------------------------------------------------------
    We begin this memo with several caveats about the limits on 
a decisive analysis of the extent and implications of China's 
international ``reach''--its soft power, a phrase we define 
below. First, there is little consensus within the U.S. and 
global China-watching communities on China's foreign policy 
goals or on what motivates and informs China's decisions--
either decisions made in general terms or with regard to 
specific regions or countries. Does China's international 
engagement have a pragmatic, overarching strategy, or is it a 
series of marginally related tactical moves to seek normal 
economic and political advantages? Is Beijing interested in 
supplanting the United States as a global power or focused 
mainly on its own national development? Does the PRC feel 
strong and confident internationally or weak and uncertain? No 
one is sure.
    Many have written on China's foreign policy decision-
making. Although China's foreign policymaking has become more 
regularized in recent years, few claim to be certain about how 
China's foreign policy decisions are made, about who makes 
them, or about what long-term goals Chinese policies seek to 
attain. Some profess certainty: however, they have not been 
able to demonstrate that their convictions lead to any sort of 
consistency in analyzing or predicting China's foreign policy 
decisions. In the aftermath of incidents of Sino-U.S. tension 
or confrontation--such as the case in 2001 when a Chinese 
fighter jet collided with a U.S. EP-3 reconnaissance plane, or 
the case in 2007 when the PRC suddenly denied Hong Kong port 
visits to a series of U.S. ships--U.S. officials have remained 
largely in the dark about the PRC's crisis management processes 
and about why and how PRC leaders reached their decisions. The 
number of unknown variables that still animate China's foreign 
policy goals and decision-making processes is simply too great. 
There appears to be no ``magic bullet'' then--no individual or 
group with proven answers--that definitively can inform U.S. 
views or prepare U.S. government and congressional actors on 
how best to prepare for the challenge China could pose to U.S. 
global interests.
    Relatedly, a study of PRC international influence is 
hampered by a lack of reliable data on Chinese foreign aid and 
by lack of transparency on whether and how the PRC makes and 
implements large, high-profile investment agreements. PRC 
assistance to other countries comes from multiple government 
agencies with little or no apparent oversight; it does not 
appear to be tracked or monitored by one single government 
entity. Many forms of PRC foreign assistance--loans, debt 
forgiveness, the building of large public facilities, and trade 
and investment agreements--do not meet the traditional 
definition of ``development assistance,'' which is how most of 
the world's donor countries provide aid. Furthermore, PRC 
assistance is not provided in regularized annual allotments, 
but appears to follow a funding schedule determined by 
Beijing's diplomatic priorities. Beijing reportedly also is 
reluctant officially to reveal the totals of its foreign 
assistance for a variety of reasons--including out of fear of 
domestic objection that Beijing is not spending its money at 
home rather than abroad.\2\ In sum, the extent of PRC foreign 
assistance to other countries cannot be determined accurately.
---------------------------------------------------------------------------
    \2\ See CRS Report RL34310, China's ``Soft Power'' in Southeast 
Asia, by Thomas Lum, Wayne Morrison, and Bruce Vaughn.
---------------------------------------------------------------------------
    Finally, although U.S. Administrations for decades have 
pursued consistent engagement with China, periodic questions 
arise about whether the U.S. approach is based on a well-
articulated and coherent strategy or is simply an approach of 
convenience that should be reassessed in the face of China's 
rise. Outside the Administration, the U.S. policy debate 
continues to be characterized by the strident dynamics that 
arose in the mid-1990s, in which American hard-liners (self-
described as the ``Blue Team'') are pitted against those 
advising cooperation and engagement with China (pejoratively 
labeled as the ``Red Team'' by the opposing group). Thus, there 
is little agreement about the degree of threat or challenge 
China poses to the United States.
    In the vocal minority are those who view China as a growing 
military menace with malign intent. These hardliners have been 
perceived sometimes by others as agitators whose counsel to 
treat China as a major threat to U.S. interests is designed to 
justify huge U.S. military budgets and is more likely to bring 
about conflict with China than to deter it. The view that has 
been pursued more openly by U.S. Administrations is one that 
counsels cooperation and engagement with China as the best way 
to integrate China into the prevailing global system as a 
``responsible stakeholder''--a nation that has ``a 
responsibility to strengthen the international system that has 
enabled its success.'' \3\ But opponents of this approach 
typically paint these as the views of ``panda-huggers'' who, 
seduced by the potential of the China market, are oblivious to 
PRC hostile intent, cave in to PRC wishes and demands 
unnecessarily, and thereby squander U.S. strategic leverage and 
compromise U.S. interests. The confrontational and highly-
charged dynamic between these two polar views continues to make 
elusive the kind of pragmatic and reasoned policy discourse 
that could create greater American consensus on how the United 
States should position itself to meet the challenges China 
poses.
---------------------------------------------------------------------------
    \3\  ``Whither China: From Membership to Responsibility?'' Speech 
by Deputy Secretary of State Robert B. Zoellick to the National 
Committee on U.S.-China Relations, September 21, 2005.
---------------------------------------------------------------------------


                       definitions of soft power


    As requested, this study focuses on China's ``soft power'' 
projection in the specified regions. The term ``soft power'' 
originally was conceived in 1990 by Harvard Professor Joseph S. 
Nye, Jr.. Nye argued that the United States had reserves of 
power and influence that were separate from ``hard power,'' or 
military force projection. He expanded greatly on this concept 
in his book, Soft Power: The Means to Success in World 
Politics--partly, he said, from the frustration of watching 
``some policy makers ignore the importance of our soft power 
and make us all pay the price by unnecessarily squandering 
it.'' \4\ According to Nye, soft power is crucially important 
in today's world politics and is significantly more than just 
the trappings of American culture:
---------------------------------------------------------------------------
    \4\ Nye, Jr., Joseph S., ``Soft Power: The Means to Success in 
World Politics,'' Public Affairs, NY, 2004, p. XI.

          Soft power rests on the ability to shape the preferences of 
        others . . . . [It] is the ability to get what you want through 
        attraction rather than coercion or payments. It arises from the 
        attractiveness of a country's culture, political ideals, and 
        policies. When our policies are seen as legitimate in the eyes 
        of others, our soft power is enhanced. America has long had a 
        great deal of soft power . . . .\5\
---------------------------------------------------------------------------
    \5\  Nye, Jr., Joseph S., p. 5, p. X.

    More broadly speaking, the components of soft power also 
are defined as including international trade, overseas 
investments, development assistance, diplomatic initiatives, 
cultural influence, humanitarian aid and disaster relief, 
education, and travel and tourism. Although American soft power 
remains formidable, by some of these measures it is seen to 
have declined in the 21 century. In absolute terms, some 
believe this perceived decline is the result of the United 
States' own policies and actions. One former U.S. Government 
official speculates that although America has massive remaining 
reserves of soft power, they have become a ``non-renewable 
resource'' given current U.S. policies.\6\ Others point to 
multiple global survey results on international views of the 
United States, saying ``the downward trend is unmistakable.'' 
\7\ As Nye himself puts it:
---------------------------------------------------------------------------
    \6\ Conversation with former Ambassador Charles W. Freeman, Jr., 
2007.
    \7\ Kurlantzick, Joshua, ``The Decline of American Soft Power,'' in 
 Current History, December 2005, p. 419.

          Anti-Americanism has increased in recent years and the United 
        States' soft power . . . is in decline as a result . . . . A 
        Eurobarometer poll found that a majority of Europeans believes 
        that Washington has hindered efforts to fight global poverty, 
        protect the environment, and maintain peace. Such attitudes 
        undercut soft power, reducing the ability of the United States 
        to achieve its goals . . . . \8\
---------------------------------------------------------------------------
    \8\ Nye, Joseph S., ``The Decline of America's Soft Power: Why 
Washington Should Worry,'' in Foreign Affairs, May/June 2004, p. 16.

    Others have attributed the perceived decline in American 
soft power as relative--largely a comparative decline based on 
the rise of other powers--in particular the rapid emergence of 
China as a U.S. ``peer competitor'' and a growing source of 
international influence, investment, and political and economic 
power. China is seen to be trying to project soft power by 
portraying its own system as an alternative model for economic 
development, one based on authoritarian governance and elite 
rule without the restrictions and demands that come with 
political liberalization. Furthermore, according to this view, 
``soft power'' is ephemeral; the United States has recovered 
from loss of prestige and influence before (such as occurred 
with the Vietnam War), and it will again. China's apparent soft 
power gains, then, should not be blown out of proportion.
    It is clear that China's foreign policy today has changed 
fundamentally in the years since Chairman Mao Zedong's policy 
of ``self-reliance'' greatly constrained the country's foreign 
contacts and when the country's foreign policy goals centered 
on promoting Maoist revolutionary parties around the world. 
Under reform policies begun in 1978, China in the past 30 years 
has openly sought and received substantial foreign investment, 
technology, and expertise; has become an international export 
powerhouse; has expanded its membership and participation in 
international organizations; and increasingly has appeared 
willing to embrace many norms and rules of the global economic 
system of which the United States is the chief architect and 
dominant player. Since 2000 in particular, there has been a 
steady increase in the PRC's courting of foreign governments, 
including high-level diplomatic exchanges, trade initiatives, 
investment agreements, and tourism and cultural understandings.
    Having progressed on a steady path in the last three 
decades on multiple global economic and political endeavors, 
China's robust international engagement since 2000 has caught 
many by surprise and has prompted growing American disagreement 
and debate over PRC motivations and objectives. The fact that 
much of this international engagement has expanded while the 
United States has been preoccupied with its military 
involvement in Iraq and Afghanistan also is causing a growing 
degree of American introspection. Moreover, many fear that 
China's growing international economic engagement is going 
hand-in-hand with expanding political influence. Although some 
believe that PRC officials appear more comfortable working with 
undemocratic or authoritarian governments, PRC outreach also 
has extended to key U.S. allies or to regions where U.S. 
dominance to date has been unparalleled and unquestioned, 
leading some to conclude that Beijing ultimately intends a 
direct challenge to U.S. global power.

                   PRESUMED PRC FOREIGN POLICY GOALS

    Within the ongoing international debate about what China's 
ultimate intentions may be for its growing global achievements, 
it is possible to point to some fundamental objectives that 
appear to be at least partial motivations for Beijing's current 
international outreach. Adding to the uncertainty about PRC 
policies, these presumed objectives at times are in 
contradiction, suggesting either a lack of coherence or that 
they reflect internal Chinese disagreements and compromise. 
China's policy direction is that much harder to predict when 
some of these key policy objectives are seen to clash, and 
experience tells us that abrupt shifts in policy, shifts which 
remain unexplained in many cases, still occur with a fair 
degree of regularity in the PRC system.

Enhancing Sustainable Economic Growth

    Strong economic development continues to be seen as the 
core primary objective for the PRC leadership for a host of 
reasons--not the least of which are to raise the living 
standards of its enormous population, to dampen social 
disaffection about economic and other inequities, and to 
sustain regime legitimacy after the demise of communist 
ideology as an acceptable organizing principle. China's annual 
economic growth rates routinely are in the double digits; in 
2007, they reached an annual rate of 11.4 percent--the highest 
since 1994.\9\ This rapid and sustained economic growth has 
created voracious domestic appetites for resources, capital, 
and technology, as well as for markets for Chinese goods, and 
these appetites have served as powerful drivers of China's 
international trade and investment agreements.
---------------------------------------------------------------------------
    \9\ Xie Fuzhan, Commissioner, National Bureau of Statistics of 
China, ``The National Economy Maintained a Steady and Fast Growth in 
2007,'' January 24, 2008.
---------------------------------------------------------------------------
    In energy sources alone, for example, China became a net 
importer in 1995--it became a net importer of oil in 1993--and 
its energy demands are expected to continue increasing at an 
annual rate of 4-5 percent through at least 2015, compared to 
an annual rate of about 1 percent in industrialized 
countries.\10\ China steadily and successfully has sought trade 
agreements, oil and gas contracts, scientific and technological 
cooperation, and de-facto multilateral security arrangements 
with countries both around its periphery and around the world. 
In all three of the regions discussed in this memo where China 
is most active, access to energy resources and raw commodities 
to fuel China's domestic growth plays a dominant role in 
Beijing's activities. China has oil and gas exploration 
contracts with Brazil, Ecuador, Bolivia, Colombia, Venezuela, 
and Cuba; oil contracts and pipeline deals are a major part of 
China's activities in its relations with Central Asian states 
such as Uzbekistan and Turkmenistan, and China's oil 
exploration interests extend to Burma, Vietnam, and Malaysia. 
Imports of crude oil constitute the bulk of China's imports 
from African states.
---------------------------------------------------------------------------
    \10\ ``China's Energy Production and Consumption,'' Energy 
Information Administration (EIA); Official Energy Statistics from the 
U.S. Government. www.eia.doe.gov/emeu/cabs/china/part2.html
---------------------------------------------------------------------------
    In pursuit of sustainable economic development, China also 
is seen to have placed a priority in keeping stable and 
relatively tension-free relations with its primary export 
market, the United States. Some analysts suggest that this 
priority is behind Beijing's decision in 2003 to tone down its 
anti-U.S. rhetoric and criticism and instead to emphasize 
China's ``peaceful rise'' on the world stage.\11\ According to 
this view, Beijing calculates that even the appearance of a 
more overt pursuit of its regional and global interests could 
prompt the United States to strengthen its alliances and form 
other groupings to counterbalance and deter China's 
international outreach. Such a development could fetter China's 
economic growth.
---------------------------------------------------------------------------
    \11\ Sutter, Robert, Chinese Foreign Relations, Rowman & 
Littlefield Publishers Inc., 2008, p. 82.
---------------------------------------------------------------------------

Squeezing Taiwan's International Space

    In addition to economic and resource-related imperatives, 
China's outreach into Latin America and the Caribbean, Africa, 
and the Pacific incorporates the political dynamic of trying to 
separate Taiwan from its remaining diplomatic relationships. 
China claims that Taiwan is part of its sovereign territory, 
and for decades has tried to make acknowledgment of this ``one 
China'' policy a condition for receiving Chinese investment and 
assistance. All but one of Taiwan's remaining 23 official 
relationships are in the three regions that are the focus of 
this memo. With China's dynamic economic growth in recent 
decades, it effectively has been able to ``outbid'' Taiwan in 
courting a number of these governments. Taiwan lost four of its 
diplomatic relationships to this competition in the last three 
years, including the loss of official relations with Malawi on 
January 14, 2008.
    The Taiwan factor is not uniformly significant in China's 
relationships with the regions under discussion. While the 
Taiwan issue is important in China's African relationships, it 
is not important in China's relations with Central Asian 
countries, where Taiwan has no official diplomatic relations. 
It is a negligible factor in China's relationships with 
Southeast Asian countries, where Taiwan has significant 
economic interests but again no diplomatic ties. And Taiwan is 
a very important factor--even perhaps the only one--in China's 
courtship of the 6 tiny Pacific Island nations that still have 
official relations with Taiwan. But Taiwan-PRC competition 
looms large in China's relationships in Latin America and the 
Caribbean. Not only is this where Taiwan maintains most of its 
remaining official diplomatic ties, but the region's proximity 
to the U.S. mainland allows Taiwan's president and senior 
leaders to ask for controversial but symbolically meaningful 
transit stops in the United States when making official visits 
to these western hemisphere countries. A significant reduction, 
or even the disappearance, of Taiwan's Latin America and 
Caribbean relationships greatly could impair this convenient 
Taiwan-U.S. connection.
    On an entirely different level, Taiwan also is a 
potentially important factor in China's activities with U.S. 
allies in Asia--Japan and Australia, especially, but also Korea 
and the Philippines. While all of these countries recognize the 
PRC and not Taiwan, as U.S. allies they potentially could 
become a factor in any U.S.-China conflict over Taiwan. In 
2005, for instance, the United States and Japan declared for 
the first time that Taiwan is a mutual security concern, 
implying a new Japanese willingness to confront China over 
Taiwan. It is in China's interests, then, to use its diplomatic 
and economic activities to exert quiet pressure on these U.S. 
allies to stay out of any possible conflict over Taiwan.
    Maneuvering against Taiwan--and ultimately ``recovering'' 
it--provides one of the key contradictions in China's foreign 
policy objectives as it is an issue that appears to be able to 
trump other key policy goals. Chinese officials have said, for 
instance, that they will ``pay any price'' to prevent Taiwan 
independence, although this would jeopardize the otherwise key 
imperative of assuring strong economic growth, not to mention 
risking armed confrontation with the United States.\12\
---------------------------------------------------------------------------
    \12\ This particular statement was made by defense attache Sun 
Yifan on August 1, 2007, speaking in Cuba on the 80th anniversary of 
the founding of the PLA. Xinhua, Aug. 2, 2007, but other PRC officials 
similarly have stressed China's resolve on the matter of Taiwan.

              Table 1. Taiwan's 23 Official Relationships*
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Latin America and the  Caribbean    Belize, Dominican Republic, El
 (12)                                Salvador, Guatemala, Haiti,
                                     Honduras, Nicaragua, Panama,
                                     Paraguay, St. Kitts and Nevis, St.
                                     Lucia, and St. Vincent and the
                                     Grenadines
Africa (4)                          Burkina Faso, Gambia, Sao Tome and
                                     Principe, and Swaziland
The Pacific (6)                     Kiribati, the Marshall Islands,
                                     Nauru, Palau, the Solomon Islands,
                                     and Tuvalu
Europe (1)                          The Vatican
------------------------------------------------------------------------
* As of February 2008

Increasing Its International Stature and Competing With U.S. Supremacy

    After decades of international isolation, PRC leaders are 
presumed also to place a high priority now on expanding and 
improving China's global stature and influence and, where they 
can, on limiting or constraining the ability of the United 
States to interfere with or adversely affect PRC interests. 
Having come late to the global economic development party, 
China is seeking multiple international partnerships and 
groupings that make it, if not an indispensable player in the 
global system, then at least one whose interests must regularly 
be taken into account.\13\ Having embraced the international 
system, Beijing is seen to be maneuvering deftly for space and 
opportunities not already taken up by the United States--
opportunities where it can have greater freedom of action. 
Lacking a formal system of alliances like those of the United 
States, the PRC has devised numerous other frameworks. These 
include efforts to act:
---------------------------------------------------------------------------
    \13\ Goldstein, Avery,  Rising to the Challenge: China's Grand 
Strategy and International Security, Stanford University Press, 2005.

    Through Bilateral Initiatives. --On a bilateral basis 
throughout Latin America, Asia, and Africa, PRC leaders have 
established Strategic Partnership Agreements, Friendship and 
Cooperative Partnership Agreements, Friendship Associations, 
and Free Trade Agreements, among other vehicles, to reinforce 
the notion that special economic relationships exist between 
China and the recipient countries. ``Chinese Friendship 
Associations'' abound all over the world, including with 
individual U.S. states. In 2004, PRC leaders created the 
``Confucius Institute''--a non-profit program to teach Chinese 
language and promote Chinese culture around the world.\14\ 
Beijing opened its first Confucius Institute in Seoul, Korea, 
in November 2004; by the end of 2007, the PRC had 203 Confucius 
Institutes around the world, including 40 in the United 
States.\15\ China also has expanded the use of Approved 
Destination Status (ADS)--a bilateral tourism arrangement with 
other countries that facilitates Chinese tourism in groups.
---------------------------------------------------------------------------
    \14\ The program is under the auspices of The Office of Chinese 
Language Council International.
    \15\ This from the Chinese Embassy in Washington D.C., January 
2008.

    Through Existing Multilateral Organizations.--In addition 
to bilateral initiatives, China increasingly has grown more 
active in international multilateral organizations that it 
formerly viewed with suspicion as U.S.-dominated institutions 
that would try to constrain and exploit PRC interests. China 
now participates more confidently in the United Nations, the 
World Bank, and other entities, even seeking to employ what one 
specialist calls a ``Gulliver Strategy'' that tries to tie down 
the United States giant in constraining international 
agreements.\16\ China also has successfully sought entry in one 
form or another to existing regional groupings in Asia and 
Latin America and the Caribbean. These include:
---------------------------------------------------------------------------
    \16\ Sutter, p. 62.


   Asia Pacific Economic Cooperation (APEC) forum, where China 
        has been a full member since 1991 (the United States is 
---------------------------------------------------------------------------
        also a member)

   ASEAN Regional Forum (ARF)--established in 1994, where 
        China is increasing its participation (the United 
        States has been criticized in recent years when 
        President Bush and Secretary of State Condoleezza Rice 
        skipped some ARF meetings, instead sending lower-level 
        officials)

   Forum for East Asia and Latin American Cooperation 
        (FOCALAE)--established in 2001, where China is a full 
        member (the United States is not a member)

   Organization of American States (OAS)--where China was 
        invited to be a permanent observer in 2004 (the United 
        States is a full member)


    Through New Multilateral Institutions.--Finally, China has 
sought to devise new multilateral organizations to support its 
own interests and expand its international influence. Beijing 
has not invited the United States to join these new 
institutions.


   East Asia Summit (EAS). In 2005, for instance, China took 
        part in the first East Asia Summit (EAS), a fledgling 
        grouping of 16 Asian and Pacific powers including 
        China, the ten members of the Association of Southeast 
        Asian Nations (ASEAN), Japan, South Korea, India, 
        Australia, and New Zealand, but excluding the United 
        States.\17\ Russia's President Putin attended as an 
        invited observer.\18\
---------------------------------------------------------------------------
    \17\ First established in 1967, ASEAN in 2005 includes Brunei-
Darassalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the 
Philippines, Singapore, Thailand, and Vietnam. The United States 
maintains military alliances with the Philippines and Thailand, and has 
significant naval and air base arrangements with Singapore.
    \18\ See CRS Report RL33242, East Asia Summit (EAS): Issues for 
Congress, by Bruce Vaughn.

   Shanghai Cooperation Organization (SCO). With the Central 
        Asian countries of the former Soviet Union, including 
        Russia, China has pursued both economic and security 
        arrangements through the Shanghai Cooperation 
        Organization another new organization founded in 2001 
        exclusive of U.S. participation.\19\ Within the SCO 
        context, China has cooperated on border enforcement, 
        signed pipeline and rail link agreements, and conducted 
        joint military maneuvers.
---------------------------------------------------------------------------
    \19\ The SCO is a more recent expansion of the ``Shanghai Five'' 
formed in 1997. SCO members include China, Russia, Uzbekistan, 
Kazakhstan, Kyrgyzstan, and Tajikistan.


   Forum on China-Africa Cooperation Forum (FOCAC). In 2000, 
        China and African countries formed the China-Africa 
        Cooperation Forum proposing that the FOCAC meet every 
        three years to seek mutual economic development and 
        cooperation. Representatives from 45 of Africa's 55 
        countries attended the FOCAC's first Ministerial 
        Conference in October of that same year; the third 
        FOCAC meeting was in Beijing in early November 2006. 
        The United States is not a member of the FOCAC.

              COMPETITIVE ADVANTAGES OF PRC ``SOFT POWER''

    Whether one is reading press accounts and scholarly 
treatises or traveling through the regions under discussion, 
the PRC seems to be everywhere. It is tempting to begin to 
think in alarmist terms, thereby magnifying presumed PRC 
strengths as well as perceived U.S. weaknesses. Many concerned 
observers focus on the competitive strengths that PRC soft 
power has in relation to the United States, pointing out that 
the PRC international approach is particularly strong in areas 
where the U.S. political system and U.S. values make it less 
competitive. Some suggest that these PRC strengths have a 
brighter future in today's global economy, meaning that China 
will have increasing economic and political soft power clout 
internationally at the expense of the United States. Still, a 
closer look at some of the PRC's presumed assets suggests that 
they may have downsides as well.

No Strings

    The recipient governments of PRC trade and investment are 
particularly attracted to the fact that Chinese money generally 
comes with none of the pesky human rights conditions, good 
governance requirements, approved-project restrictions, and 
environmental quality regulations that characterize U.S. and 
other Western government investments. With an authoritarian 
government that has few if any democratic imperatives, China 
has capitalized on its willingness to make such 
``unrestricted'' international investments as part of its 
``win-win'' international strategy.
    In response to the December 2006 military coup in Fiji, for 
instance, Beijing promised to continue its aid programs on the 
grounds that the coup was Fiji's ``internal'' affair. (PRC 
leaders do not appear to define the recipient country's 
adoption of the ``one-China'' policy as such a restriction.) 
China markets this capacity internationally as a key 
competitive advantage to Western capital--one that is both more 
efficient and less intrusive for the recipients. And the 
unrestricted nature of PRC investments resonates with many 
foreign governments. According to one African leader, for 
instance:


         . . . I have found that a contract that would take five years 
        to discuss, negotiate and sign with the World Bank takes three 
        months when we have dealt with Chinese authorities. I am a firm 
        believer in good governance and the rule of law. But when 
        bureaucracy and senseless red tape impede our ability to act--
        and when poverty persists while international functionaries 
        drag their feet--African leaders have an obligation to opt for 
        swifter solutions.\20\
---------------------------------------------------------------------------
    \20\ Senegal President Abdoulaye Wade, in ``Time for the west to 
practise what it preaches,'' Financial Times, Jan. 24, 2008, p. 6.


    The World Bank and the U.S. and other Western governments 
may be able to increase the efficiency of their international 
investment processes and reduce attending red tape to compete 
with these PRC advantages. But Beijing's willingness to make 
unrestricted investments while holding the recipients to no 
standards implicitly validates the policies of the recipient 
(and often authoritarian) governments. Such a ``hands-off'' 
approach could have negative longer-term implications for how 
the PRC is viewed within the countries in which it is 
investing. Over the longer term, then, China's approach has 
potential negative consequences that could counterbalance any 
soft power advantages.

The Advantage of State-Owned Assets

    The PRC also is thought to reap soft-power advantages by 
having much of its foreign investment carried out by its strong 
state-owned sector. These state corporations lack transparency, 
have deep pockets backed by government assets, and operate 
without the constraints that come with having to issue a 
corporate annual report. Unlike U.S. corporations investing 
overseas, who lack this close government patronage and in 
addition must answer to their shareholders, PRC state-owned 
companies have the luxury of being able to take a longer-term, 
strategic view--one more closely integrated with national 
priorities--without having to demonstrate immediate profits. 
But again, there are negative consequences; there is a certain 
discipline in having to adhere to the bottom line. PRC state-
owned companies, lacking this built-in discipline, sometimes 
are seen to have paid above-market prices for their oil and gas 
contracts and to have entered into unprofitable initial 
arrangements in order to improve bilateral relations and 
facilitate future contracts.

                   LIMITATIONS ON PRC ``SOFT POWER''

    Even if its international outreach is entirely benign and 
centered on economic growth, the PRC's potential to expand 
quickly to consumption and production levels comparable to 
those of the United States presents profound challenges to 
American and global interests. But more alarmist projections 
tend to minimize or overlook other limitations and 
complications that confront China's overseas activities. 
Recognition of these and other limitations of PRC influence may 
help shape a more effective U.S. response.

Lack of Success

    For one thing, PRC actions in a given country do not always 
lead to Beijing's desired objective. Haiti in 2008 continues to 
have diplomatic relations with Taiwan, for instance, despite 
PRC efforts in 2005 to make severing Haiti's relations with 
Taiwan a condition of Beijing's support for renewing the U.N. 
peacekeeping mission there. In another example, the PRC's 
efforts to extend its influence in Central Asia through 
formation of the Shanghai Cooperation Organization did not 
prevent individual SCO member countries from hosting U.S. 
military forces after the September 11 terrorist attacks in the 
United States. Moreover, PRC foreign policy success in 
sometimes constrained by the fact that the countries Beijing is 
courting have other, more complex foreign policy interests. 
According to one study of U.N. voting records, for example, a 
country's increased dependence on trade with China does not 
appear to affect its willingness to vote against PRC interests 
in the United Nations.\21\
---------------------------------------------------------------------------
    \21\ The study, an examination of U.N. voting records from 1991--
2003, conducted in 2006 by the Inter-American Dialogue, is discussed 
more fully in the Latin America section of this memo.
---------------------------------------------------------------------------

The Narrow Base of PRC Achievements

    In general, China's new ``win-win'' approach to 
international interactions is based on a self-interested 
approach that focuses only on those issues on which all sides 
supposedly can agree. Easy things are taken care of first, 
while inconvenient and difficult things are postponed, possibly 
indefinitely. Racking up trade and investment agreements in 
this way, while creating symbolically significant headlines, 
nevertheless leaves a lack of depth in China's overall 
relationships. Moreover, as already mentioned, China's 
lamentable lack of transparency raises consistent doubts about 
whether the levels of aid and investment triumphantly announced 
are the levels of aid and investment actually provided.
    To cite only one example, China initially reported that it 
pledged $63 million in assistance to Indonesia after the 2004 
tsunami, a figure dwarfed by the $405 million pledged by the 
United States. A later article in a PRC publication, however, 
put the actual amount of PRC Indonesian assistance at $22.6 
million.\22\ PRC foreign policy achievements will be 
constrained if Beijing continues to short-change its intended 
recipient governments in this way. U.S. observers need to be 
cautious, then, about the initial headlines of PRC involvement 
and more mindful of the degree of follow-through.
---------------------------------------------------------------------------
    \22\ Xing Zhigang, ``China pledges to increase humanitarian aid,'' 
China Daily, January 19, 2006. Cited also in Sutter, p. 108.
---------------------------------------------------------------------------
    Moreover, a ``win-win'' strategy is a slender reed for 
maximizing comprehensive soft power. The soft power potential 
that the PRC can hope to gain from such a strategy pales next 
to the national capacity and willingness of the United States 
to take on costly and forlorn global tasks such as 
international disaster aid--to demonstrate a willingness, in 
the words of Tony Blair, ``to be the recipient of every demand, 
to be called upon in every crisis, to be expected always and 
everywhere to do what needs to be done.'' \23\ Nothing in 
Beijing's current soft power approach suggests it is willing to 
embrace such altruism.
---------------------------------------------------------------------------
    \23\ Prime Minister Tony Blair, ``Doctrine of the International 
Community,'' in a speech before the Chicago Economic Club, April 22, 
1999.The Complications of an International Presence. Even with a ``win-
win'' strategy, acquiring and maintaining an enhanced international 
presence brings with it certain complications. Among other things, it 
provides almost innumerable opportunities for international 
misunderstanding, resentment, cultural backlash, kidnappings, hard 
feelings, murders, and other assorted repercussions. Cultural backlash 
and resentment may be heightened by the style that PRC overseas 
investments and construction projects have pursued to date--involving 
the import of Chinese workers instead of using the local population. 
Chinese overseas operations already have begun to experience fallout 
from their activities: PRC oil drilling sites and well-workers have 
been attacked, kidnapped, or killed in Sudan, Somalia, Nigeria, and 
elsewhere in Africa. Some Central Asia countries have grown concerned 
about the level of energy assets that China has been accruing within 
their borders and have moved to limit such acquisitions. In some Asian 
countries with high ethnic Chinese populations, there has been push-
back against perceived ``Chinese'' businesses and other interests. As 
China's international activities expand, confrontations along these 
lines are likely to increase, possibly garnering unfavorable publicity 
for the PRC and putting stress on the ``win-win'' approach.
---------------------------------------------------------------------------
    Foreign entanglements also could raise political problems 
at home for PRC policymakers. The increasing availability of 
Internet and cell phone use assures that growing numbers of 
Chinese citizens have more access to information, including 
information about China's international activities. 
Confirmation that China is investing millions of dollars in 
overseas projects, while at home unemployment soars and 
infrastructure development lags, may prove objectionable to the 
hundreds of millions of PRC citizens still living below the 
poverty line--much the way many Americans sometimes react to 
U.S. overseas investment.

The ``Private Sector'' Calculation

    As noted above, Beijing is seen to have advantages over the 
United States in that its overseas activities and investments 
are conducted by strong, well-funded state-owned companies. 
These large PRC government activities attract much 
international attention and give a ``hard'' edge to PRC soft 
power. The United States has little to match such centrally 
directed initiatives, particularly in the wake of years of U.S. 
budget cutbacks in--and in the case of the U.S. Information 
Agency, the termination of--high-profile U.S. international 
public diplomacy programs. But comparing only government-
directed and funded activities overlooks the huge advantage the 
United States has in the extent of its substantial global 
private-sector presence. In addition to U.S. business 
interests, American products, schools, newspapers, journals, 
banks, movies, TV programs, novels, rock stars, medical 
institutions, politicians, Chambers of Commerce, state 
governments, culture, religious groups, ideas, NGOs, and other 
American institutions and values are liberally scattered over 
the global map. While this U.S. presence is diverse, 
uncoordinated, not centrally directed, and at times triggers 
anti-American feelings, it nevertheless leaves a substantial 
global footprint.

                    IMPLICATIONS FOR U.S. INTERESTS

    Certainly a case can be made for considering the 
motivations behind the PRC's international activities to be 
what Beijing claims them to be--a country's natural and 
legitimate pursuit of peaceful global opportunities for 
economic growth. Moreover, PRC interests appear to have 
benefited more substantially by operating within the current 
global system, of which the United States is the chief 
architect, than by challenging it. The United States would be 
served, then, by encouraging China's further integration into 
the global system. Even so, it is clear that China's growing 
international muscle, even if natural and benign, by definition 
increasingly must compete with and even limit U.S. freedom to 
pursue American global interests relatively unencumbered.
    But it also is possible to support skepticism concerning 
the ``benign rise'' notion by pointing to historical examples 
in the 19th and 20th centuries of confrontation and outright 
warfare between reigning powers such as the United States and 
rising powers such as the PRC. Through this more skeptical 
lens, the PRC presence in Latin America and the Caribbean has 
particularly worrisome implications. It could help strengthen 
anti-democratic and anti-U.S. political leaders and actors in 
some countries; moreover, in the event of a possible U.S. 
military conflict with China, PRC human and commercial 
infrastructure in Latin America would be well placed to disrupt 
and distract the United States in the hemisphere and to collect 
intelligence data against U.S. forces operating in the 
region.\24\
---------------------------------------------------------------------------
    \24\ R. Evan Ellis, ``The Military-Strategic Dimensions of Chinese 
Initiatives in Latin America,'' China-Latin America Task Force, Center 
for Hemispheric Policy, University of Miami, February 16, 2007.
---------------------------------------------------------------------------
    Whichever of the above policy directions the PRC is 
traveling and whatever its ultimate intentions, its 
international engagement and growing economic clout pose 
demanding challenges and questions for U.S. policymakers. Some 
of these include:


   How will the United States deal with increasing competition 
        by China for leverage and influence, not only in terms 
        of new economic and political international 
        relationships, but for current U.S. relationships with 
        allies and other countries where U.S. influence to date 
        has been dominant?

   How can the United States hedge against possible PRC 
        hegemonic ambitions in Asia without creating a self-
        fulfilling prophecy?

   How detrimental is PRC ``unrestricted'' investment and 
        assistance for U.S. efforts to promote good governance 
        around the world and to limit corruption? How 
        detrimental are the PRC's perceived advantages to the 
        ability of U.S. companies to compete for international 
        business, and what policies and agreements should the 
        United States put in place to mitigate these effects?

   What are the implications for U.S. global objectives and 
        for institutions that are seen to espouse Western 
        values, such as the IMF and the World Bank, if the PRC 
        increasingly begins to compete directly as an 
        international lender offering less encumbered 
        assistance?

   As the PRC increasingly expands its ``hard power'' assets--
        naval and military power--to protect its growing 
        international interests, how much greater are the 
        prospects for Sino-U.S. military confrontation, either 
        deliberate or accidental, and how should the U.S. 
        prepare for and deal with these prospects?

   What policies should the United States adopt to prepare for 
        increasingly robust U.S.-China competition for energy 
        resources, international commodities, and space 
        exploration?

   What will it mean for the United States and U.S. interests 
        should Taiwan lose its remaining diplomatic 
        relationships around the world? Should the United 
        States seek to play a more active role in seeking to 
        improve Taiwan's international position--perhaps by 
        reassessing current U.S. policy toward Taiwan in light 
        of China's rise?

   How should the United States respond, if at all, to any 
        global perceptions of U.S. disengagement around the 
        world?

                                OPTIONS

    Should U.S. policymakers decide that the status quo is 
sufficient protection for U.S. interests, then little if any 
action need be taken. The status quo presumes that U.S. soft 
power, complex and multi-faceted as it is, will be dominant 
globally far into the future and sufficiently resilient to 
weather temporary ups and downs; that the capacity for PRC 
global soft power will remain limited, both by Beijing's own 
policy predilections and by other countries' self-interests; 
and that the PRC will remain too pre-occupied with resolving 
its own significant domestic economic inequities, 
infrastructure problems, political transformation pressures, 
and social instabilities to focus significant effort on its 
global presence.
    Should U.S. policymakers decide that the PRC's invigorated 
activities around the world require a U.S. response to offset 
or better compete with China, there are innumerable policy 
options that might be considered, in both the ``hardline'' and 
``stakeholder'' categories. Each of these possibilities 
involves policy trade-offs. These, discussed in more complete 
detail throughout this memo, are briefly summarized below. They 
include:


   Reinvigorate U.S. engagement around the world to counter 
        PRC soft power, including the expansion of U.S. public 
        diplomacy. In Asia, this could include active 
        participation in building the emerging economic and 
        political/security architecture of the region. In 
        Africa, it could include increased and more efficient 
        U.S. bilateral cooperation, trade, and military 
        relations, including the prospect of directly involving 
        the PRC and African governments in bilateral and 
        multilateral dialogue with the aim of defining goals, 
        issues, and agendas of mutual interest. U.S. 
        policymakers also could work to achieve greater 
        efficiency and to cut red tape in U.S. and multilateral 
        institution assistance and investment in the regions.

   Seek to counter PRC efforts to isolate Taiwan by making 
        support for Taiwan's greater international 
        participation a condition of U.S. assistance and 
        economic interaction with other countries.

   Seek observer status within the SCO and the EAS, and urge 
        China and African countries to create an observational 
        status within the Forum on China-Africa Cooperation, 
        enabling the United States and other countries to learn 
        about the policy priorities of these groups and to 
        participate in consultations on time-sensitive, urgent 
        challenges in these regions, including armed conflicts, 
        humanitarian crises, and security threats to Chinese 
        and U.S. businesses.

   Urge China to support an equitable, rule-based global legal 
        and business environment and help to develop the rule 
        of law in the regions in which it is investing by 
        signing up to public-private sector good governance 
        initiative and agreements.

   Maintain and publicize an accurate calculus of actual PRC 
        assistance and investment that is delivered, as opposed 
        to that which is merely announced.

   Encourage China to join in multilateral and country-level 
        donor foreign assistance dialogues and related efforts 
        to prioritize key goals related to African development 
        and coordinate aid efforts in order to create 
        synergies, avoid duplication, and maximize each donor's 
        strengths--including infrastructure construction in the 
        case of China.

   Offer to work collaboratively with China to help it to 
        design, coordinate, and increase the efficiency of its 
        nascent institutional foreign aid structure, including 
        with respect to more clearly differentiating its 
        official grant-based aid from its subsidization of 
        trade and commerce credit; monitoring the effectiveness 
        of its aid strategies; harmonizing aid reporting with 
        other donor governments; and developing best practices 
        in support of transparency and accountability.

   Focus on an assertive U.S. role in solving regional 
        problems, including health care to address HIV/AIDS, 
        malaria and other diseases; providing drugs, and 
        building clinics; alternative energy sources; 
        improvements in agricultural development capacities and 
        providing increased education and human resource 
        training.

   Emphasize cooperation among Russia, China, the EU, and 
        other outside powers in assisting fragile states to 
        develop their independence and security.

   Work harder to ensure that U.S. democratization and human 
        rights values are not seen by other countries as 
        encumbrances and prohibitions placed in the way of, but 
        instead as things that ultimately will improve, their 
        economic progress.

   Re-think the current U.S. ``gold standard'' in regional and 
        bilateral Free Trade Agreements, especially when such a 
        standard requires substantial changes in domestic laws.

   Reinvigorate the Asia-Pacific Economic Cooperation Forum 
        (APEC) as a vehicle for U.S. soft power influence in 
        Asia.


                              ----------                              


                  Latin America and the Caribbean\25\

---------------------------------------------------------------------------
    \25\ Prepared by Mark P. Sullivan, Specialist in Latin American 
Affairs. This memo draws from CRS Report RS22119, China's Growing 
Interest in Latin America, April 20, 2005, by Kerry Dumbaugh and Mark 
P. Sullivan.
---------------------------------------------------------------------------

                                OVERVIEW

    China's growing interest in Latin America and the Caribbean 
is a fairly new phenomenon that has developed over the past 
several years. Beginning in April 2001 with President Jiang 
Zemin's 13-day tour of Latin America, a succession of senior 
Chinese officials have visited Latin American countries to 
court regional governments, while Latin American leaders also 
have been frequent visitors in Beijing. China's primary 
interest in the region appears to be to gain greater access to 
needed resources--such as various ores, soybeans, copper, iron 
and steel, and oil--through increased trade and investment. It 
is also likely that Beijing's additional goal is to isolate 
Taiwan by luring the 12 Latin American and Caribbean nations 
still maintaining diplomatic relations with Taiwan to shift 
their diplomatic recognition to China. While China's economic 
linkages with Latin America have grown, the U.S. advantage of 
geographical proximity means that the PRC presence is likely to 
remain dwarfed by U.S. trade with and investment in the region. 
Moreover, although many Latin American countries welcome 
Chinese investment, some have viewed China as an economic 
threat, and are concerned that both their domestic industries 
and their U.S. export markets will be overwhelmed by Chinese 
competition. Nevertheless, some analysts maintain that 
Beijing's growing role in the region may have longer-term 
implications for U.S. regional interests and influence.

                               DIPLOMACY

Bilateral Relations and Competition With Taiwan

    Of the 33 independent countries in the Latin America and 
Caribbean region, China currently has official diplomatic 
relations with 21, while the remaining 12 nations maintain 
relations with Taiwan (see Table 1). For ideological reasons, 
Communist Cuba was the first nation in the region to recognize 
China back in 1960, while Chile under Socialist President 
Salvador Allende was the second in 1970. Mexico established 
relations with China in 1972, and most South America nations 
did so in the 1970s and 1980s, including Argentina and Brazil, 
which were run by military dictatorships at the time. In 
addition to Cuba, nine other Caribbean nations have diplomatic 
relations with the PRC, five of which have had relations since 
the 1970s.
    Over the years, China has signed a variety of bilateral 
partnership agreements with several countries in the region in 
order to strengthen relations. The most politically significant 
of these are known as ``strategic partnership agreements.'' To 
date, China has signed such agreements with Brazil (1993), 
Venezuela (2001), Mexico (2003), and Argentina (2004). 
Additional ``cooperative partnership'' or ``friendly and 
cooperative partnership'' agreements have been signed with 
Bolivia, Chile, Colombia, Cuba, Ecuador, Jamaica, and Peru.\26\ 
In the 1980s, China began to augment its expertise on Latin 
America through agreements for Chinese officials to travel to 
the region to study Spanish, and through the development of 
think tanks such as the Institute of Latin American Studies of 
the Chinese Academy of Social Sciences (CASS) and the 
Department of Studies about Latin America of the Chinese 
Communist Party.\27\
---------------------------------------------------------------------------
    \26\  Jorge Dominguez, ``China's Relations with Latin America: 
Shared Gains, Asymmetric Hopes,'' Inter-American Dialogue, Working 
Paper, June 2006, p. 23; Derek J. Mitchell, ``China and the Developing 
World,'' pp. 126-127, paper prepared for May 2007 conference, The China 
Balance Sheet in 2007 and Beyond, sponsored by the Center for Strategic 
and International Studies; and ``China's Quest for Regional Influence: 
A Balance,'' Latinnews.com, Southcom Strategic Paper, September 2006, 
p. 3.
    \27\ Dominguez, p. 22.
---------------------------------------------------------------------------
    For many of the region's nations, particularly in the 
Caribbean and Central America, there has been a political 
dynamic in China's expanding economic linkages and foreign 
assistance. China, with some success, has been trying to woo 
countries away from recognizing Taiwan. Taiwan's official 
relations in the region now include five Central American 
countries, six in the Caribbean, and one in South America.
    For decades, Taiwan was a consistent provider of financial 
assistance and investment in Latin America and the Caribbean in 
order to nurture its remaining official relationships, a policy 
often referred to as checkbook or dollar diplomacy. But Taipei 
now is hard-pressed to compete against the growing economic and 
diplomatic clout of China, which in recent years has stepped up 
its own version of checkbook diplomacy. Since 2004, three 
countries in the region have switched their diplomatic 
recognition from Taiwan to the PRC: Dominica in March 2004, 
Grenada in January 2005, and most recently, Costa Rica in June 
2007. Dominica severed relations with Taiwan in 2004 after 
Beijing trumped Taiwan's $9 million in assistance with a pledge 
of $122 million in assistance to the tiny country over six 
years.\28\
---------------------------------------------------------------------------
    \28\ ``Dominica severs ties with Taiwan,'' BBC Caribbean, March 29, 
2004.

 Table 2. China vs. Taiwan: Diplomatic Recognition in Latin America  and
                              the Caribbean
------------------------------------------------------------------------
   Countries Recognizing China    Countries Recognizing the Republic  of
              (PRC)                       China, or ROC (Taiwan)
------------------------------------------------------------------------
Mexico
------------------------------------------------------------------------
CENTRAL AMERICA:
Costa Rica                        El Salvador, Guatemala, Honduras,
                                   Nicaragua, Panama
------------------------------------------------------------------------
CARIBBEAN:
Antigua and Barbuda, Bahamas,     Belize, Dominican Republic, Haiti, St.
 Barbados, Cuba, Dominica,         Kitts and Nevis, St. Lucia, St.
 Grenada, Guyana, Jamaica,         Vincent and the Grenadines
 Suriname, Trinidad and Tobago
------------------------------------------------------------------------
SOUTH AMERICA:
Argentina, Bolivia, Brazil,       Paraguay
 Chile, Colombia, Ecuador, Peru,
 Uruguay, Venezuela
------------------------------------------------------------------------

    Grenada switched its recognition to China in the aftermath 
of Hurricane Ivan that devastated the island in September 2004 
and destroyed a new cricket stadium that Taiwan had helped 
build. Disappointed about Taiwan's response after the 
hurricane, Grenadian Prime Minister visited China and received 
support for the rebuilding of the cricket stadium, with workers 
supplied by China, as well as other grants, support for the 
agricultural sector, and scholarships.
    Most recently, Costa Rica under President Oscar Arias 
switched diplomatic recognition to China in June 2007 in large 
part because of growing trade relations in recent years and the 
prospect for increased Chinese trade and investment. China is 
now Costa Rica's second largest trading partner, after the 
United States, and the two countries are considering a free 
trade agreement.
    China's overtures in the Caribbean experienced a setback in 
May 2007 when St. Lucia switched its diplomatic recognition 
back to Taiwan after ten years of recognizing the PRC. The 
diplomatic switch was related to the ouster of Prime Minister 
Kenny Anthony's St. Lucia Labour Party (SLP) from power in 
December 2006, and the election of a new government led by the 
United Workers Party (UWP). (In 1997, the ruling SLP government 
under Anthony had orchestrated a diplomatic switch from Taiwan 
to China.) Taiwan's promises of assistance to the new UWP 
government in 2007 includes support for public health, 
education (including the provision of computers and 
scholarships), and development of the agricultural sector.

Regional Organizations

    Despite the setback with St. Lucia, the PRC's ability to 
develop and expand contacts with Taiwan's friends in the region 
has been facilitated by a decision by the Organization of 
American States (OAS) in May 2004 to accept China as a formal 
permanent observer in the OAS. The OAS has 35 members, 
including the United States and all 12 of the region's 
countries currently conferring diplomatic relations on Taiwan. 
Some 60 countries worldwide are OAS permanent observers, but 
Beijing has strongly objected to Taiwan's efforts to seek 
observer status.
    In addition to the OAS, China has participated in several 
other regional organizations. Dating back to 1975, China has 
often sent its observers to the annual meetings of the Agency 
for the Prohibition of Nuclear Weapons in Latin America and the 
Caribbean (OPANAL), the organization set up in the aftermath of 
the 1967 signing of the Tlatelolco Treaty prohibiting nuclear 
weapons in the region. The PRC has been an observer since 1994 
to the Latin American Integration Association (ALADI), a 12-
member regional organization focusing on trade integration and 
the goal of a common market. China is a member of the East 
Asia-Latin American Cooperation Forum (FOCALAE), an 
organization first established in 2001 that brings together 
ministers and officials from 33 countries from the two regions 
for strengthening cooperation in such areas as education, 
science and technology, and culture. The PRC also is a member 
of the Asia Pacific Economic Cooperation (APEC) forum that 
annually brings together leaders of 21 Pacific rim nations 
(including Taiwan as ``Chinese Taipei'') as well as the Latin 
American nations of Chile, Mexico, and Peru.
    More recently, in March 2007, China signed an agreement 
with the Inter-American Development Bank (IDB) to formalize 
talks on the PRC's request to become an IDB member. The bank 
has launched an internal discussion on whether to accept China 
as a member. If accepted, China would join Japan and Korea to 
become the third Asian country to join the IDB. China is 
already a member of the Caribbean Development Bank based in 
Barbados.
    China has also helped support UN peacekeeping operations in 
the region through its contribution of a ``special police'' 
peacekeeping contingent of 125 personnel as part of the United 
Nations Stabilization Mission in Haiti (MINUSTAH) that began in 
2004. This marked Beijing's first deployment of forces ever in 
the Western Hemisphere. MINUSTAH's mission, which was due to 
expire in mid-October 20007, was extended for another year 
until October 2008. In 2005, China reportedly put pressure on 
Haiti to switch its diplomatic recognition from Taiwan to the 
PRC as a condition for supporting the renewal of the UN 
peacekeeping mission, but Haiti has retained its relations with 
Taiwan.\29\
---------------------------------------------------------------------------
    \29\ Rowan Scarborough, ``China Seen Averse to Haiti-Taiwan Ties; 
Blocks Extension of UN Mission,'' Washington Times, June 8, 2005; and 
``Haiti: Extending Minustah's Mandate,'' Latin American Caribbean and 
Central American Report, August 16, 2007.
---------------------------------------------------------------------------

Analysis

    For now, it appears that China and Taiwan will continue to 
battle for diplomatic recognition, using the prospect of 
increased aid, trade, and investment to sway the decisions of 
the remaining dozen nations recognizing Taiwan. Some observers 
maintain that key countries to watch include the Central 
American countries of Nicaragua and Panama, the Caribbean 
nation of the Dominican Republic, and Paraguay, the sole South 
American nation that continues to recognize Taiwan.\30\ In the 
aftermath of Costa Rica's June 2007 decision to switch 
diplomatic partners, Chinese officials predicted a domino 
effect in which other countries would switch their recognition 
to China, but Taiwan launched an initiative in the region in 
order to counter China's attempts to tempt additional countries 
to switch sides that appears to have been successful in the 
short term. Nevertheless, over the long run, China's sheer 
economic size and power bodes well for its ability to entice 
Taiwan's remaining 12 allies in Latin America and the Caribbean 
to switch diplomatic sides.
---------------------------------------------------------------------------
    \30\ Central America: Daniel P. Erikson and Janice Chen, ``China, 
Taiwan, and the Battle for Latin America,'' The Fletcher Forum of World 
Affairs, Vol. 31:2 Summer 2007.
---------------------------------------------------------------------------
    Beyond competition with Taiwan, China's diplomatic efforts 
in the larger countries of the region appear to be geared at 
strengthening relations and expanding cooperation with nations 
that have potential resources and investment opportunities that 
could help feed China's resource needs and expanding economy. 
These diplomatic overtures in Latin America also satisfy 
China's efforts to foster relations with other developing 
countries worldwide and its promotion of South-South 
cooperation.
    A 2006 study by the Inter-American Dialogue examined the 
1991--2003 UN voting records of several major Latin American 
countries--Argentina, Brazil, Chile, Mexico, and Venezuela--and 
concluded that the increased Chinese trade with the region in 
recent years has had no discernable effect on the voting 
behavior of these nations. The study also looked at several 
countries having diplomatic relations with Taiwan--Costa Rica 
(before it switched diplomatic relations to the PRC), Panama, 
and Paraguay--and found little difference in voting coincidence 
with China between countries that recognize China and those 
that recognize Taiwan. Cuba, for political reasons, stands out 
as the Latin American country with a high voting coincidence 
with China, although increases in economic linkages do not 
appear to have had an impact on Cuba's voting behavior.\31\
---------------------------------------------------------------------------
    \31\ Dominguez, pp. 12-18.
---------------------------------------------------------------------------
    While countries in the region that recognize Taiwan often 
speak out in favor of its inclusion at the UN and its various 
agencies, this is not always the case. During a vote in 2007 on 
Taiwan's membership in the World Health Organization (WHO), 
Panama and Nicaragua both abstained, while Costa Rica, which 
recognized Taiwan at the time, voted against its 
membership.\32\
---------------------------------------------------------------------------
    \32\ ``China Seen Edging Taiwan in LatAm Diplomacy,'' Agence France 
Presse, May 29, 2007.
---------------------------------------------------------------------------

                             ECONOMIC TIES

Trade

    Much of China's interest in Latin America--especially in 
South America--is economically motivated, with Beijing eager 
for access to such commodities as iron and other ores, 
soybeans, copper, iron and steel, integrated circuits and other 
electrical machinery, and oil in order to meet the demands of 
China's booming economy. Total trade between China and the 
Latin America and Caribbean region rose from $8.2 billion in 
1999 to almost $70 billion in 2006 (see Figure 1). During this 
period, China's trade with the region as a percentage of its 
world trade increased from 2.3% in 1999 to 4% in 2006. For many 
countries in the regions, China has become a major trading 
partner and ranks as one of the top four export and import 
markets. China signed a free trade agreement (FTA) with Chile 
in 2005, and in October 2007 China and Costa Rica announced 
that they would explore the feasibility of an FTA.
    China's imports from the region grew from almost $3 billion 
in 1999 to almost $34 billion in 2006, more than an eleven-fold 
increase in seven years.\33\ Because of this growth in imports, 
China has run a trade deficit with the region for three out of 
the past four years. While imports from Latin America are just 
a small percentage of China's overall imports, they grew from 
1.8% of total Chinese imports in 1999 to 4.3% in 2006. China's 
top five import sources in Latin America in 2006 were Brazil 
($12.9 billion), Chile ($5.7 billion), Argentina ($3.7 
billion), Peru ($2.9 billion), and Venezuela ($2.7 billion). 
Major imports from the region in 2006 included: iron, copper, 
lead and other ores (30%); soybeans (14%); oil and other 
mineral fuel (14%); copper (7.5%); and electrical machinery 
(largely integrated circuits) 8.3%. For most countries in the 
region, one or two commodities dominate their exports to China. 
(See Table 3.)
---------------------------------------------------------------------------
    \33\ Trade statistics are from the World Trade Atlas, which uses 
official Chinese government data.
---------------------------------------------------------------------------
    China's exports to Latin America have also grown 
considerably in the last seven years, from $5.3 billion in 1999 
to $35.8 billion in 2006. Major exports have included 
electrical machinery; home, office, and other appliances, 
including computers; woven and knit apparel; footwear; and 
organic chemicals. During this period, the overall share of 
China's exports to the region as a percentage of its worldwide 
exports, although small, increased slightly from 2.7% in 1999 
to 3.7% in 2006. China's top five export destinations in Latin 
America in 2006 were Mexico ($8.8 billion), Brazil ($7.4 
billion), Panama ($3.9 billion), Chile ($3.1 billion), and 
Argentina ($2 billion).

  Figure 1. China's Trade with Latin America and the Caribbean (LAC)--
                       1999-2006 (U.S. $millions)



  Source: World Trade Atlas, which uses Chinese Government statistics.

     Table 3. China's Imports from Latin America and the Caribbean (LAC)  in 2006: Top Ten Source Countries
----------------------------------------------------------------------------------------------------------------
                                                                  Percent of Total
                 Country                   Import Value  (U.S.     LAC Exports to     Country's Major Exports to
                                               $ billions)             China                    China
----------------------------------------------------------------------------------------------------------------
Brazil...................................                12.9                 38.0   Iron Ore (44%)
                                                                                     Soybeans (23%)
Chile....................................                 5.7                 16.7   Copper Ore and Copper (79%)
Argentina................................                 3.7                 10.9   Soybeans and Soybean Oil
                                                                                      (61%)
Peru.....................................                 2.9                  8.5   Copper, Iron, and other
                                                                                      Ores (53%)
Venezuela................................                 2.7                  7.8   Oil (89%)
Mexico...................................                 2.6                  7.7   Electrical Machinery and
                                                                                      Machinery (57%)
Costa Rica...............................                 1.7                  5.1   Integrated Circuits (96%)
Cuba.....................................                 0.5                  1.6   Nickel (54%)
Jamaica..................................                 0.4                  1.1   Aluminum Oxide (99%)
Uruguay..................................                 0.3                  0.8   Soybeans (47%)
----------------------------------------------------------------------------------------------------------------
Source: World Trade Atlas, which uses Chinese Government statistics.

    In terms of China's trade importance for the region, as 
noted above, China ranks as one of the top four export markets 
and import markets for many countries in the region. Looking at 
Latin America and the Caribbean as a whole, almost $26 billion 
or about 3.7% of the region's exports worldwide in 2006 were 
destined for China while about $53 billion or about 8% of its 
imports were from China.\34\ Table 4 shows the relative 
significance of China as a trading partner for several 
countries in the region in 2006.
---------------------------------------------------------------------------
    \34\ Calculations derived from trade statistics presented in: 
International Monetary Fund, Direction of Trade Statistics, 2007 
Yearbook.
---------------------------------------------------------------------------

Investment

    While China's trade flows have increased dramatically, both 
globally and with Latin America, Chinese foreign direct 
investment (FDI) abroad, while increasing, has not been as 
significant. China's cumulative stock of FDI worldwide amounted 
to $73.3 billion at the end of 2006--just 0.58% of global FDI 
stock.\35\ Traditionally, a large majority of China's 
investment abroad has been concentrated in Asia, largely Hong 
Kong, although in recent years, investment to Latin America and 
the Caribbean has been increasing.
---------------------------------------------------------------------------
    \35\ UNCTAD, ``World Investment Report 2007,'' October 2007.
---------------------------------------------------------------------------
    The cumulative stock of Chinese FDI in Latin American and 
Caribbean rose from $4.6 billion in 2003, accounting for almost 
14% of China's FDI stock worldwide, to $11.5 billion in 2005, 
accounting for 20% of China's investment worldwide.\36\ Closer 
scrutiny of China's FDI data for the region, however, shows 
that the overall level could be significantly overstated. An 
overwhelming majority of Chinese FDI to the region goes to 
three British dependencies--the Cayman Islands, the British 
Virgin Islands, and Bermuda--that are known as tax havens. In 
2005, almost 96% of Chinese FDI in Latin America and the 
Caribbean went to these three nations. These three nations are 
also major sources of FDI into China, showing that the possible 
intention of China's FDI into these jurisdictions could be so-
called ``round-tripping,'' whereby Chinese investors bring the 
capital back into the country as foreign capital in order to 
take advantage of preferences given to foreign firms.
---------------------------------------------------------------------------
    \36\ He Li, ``China's Growing Interest in Latin America and Its 
Implications,'' The Journal of Strategic Studies, Vol. 30, No. 4-5, 
August-October 2007, p. 845, utilizes statistics from China's Ministry 
of Commerce.

         Table 4. Importance of China as a Trading Partner for Selected  Latin American Countries, 2006
----------------------------------------------------------------------------------------------------------------
                                Exports to China        Percent of       Imports from China       Percent of
           Country             (U.S. $ millions)    Country's Exports    (U.S. $ millions)    Country's Imports
----------------------------------------------------------------------------------------------------------------
Argentina...................               3,473                  7.5                2,150                  6.3
Brazil......................               8,399                  6.1                7,989                  8.7
Chile.......................               4,934                  8.8                3,487                 10.0
Colombia....................               1,066                  1.9                5,250                  8.5
Costa Rica..................                 558                  6.6                  543                  4.3
Mexico......................               1,688                  0.7               24,438                  9.5
Paraguay....................                  20                  1.0                1,412                 26.9
Peru........................               2,267                  9.7                1,586                 10.4
----------------------------------------------------------------------------------------------------------------
Source: World Trade Atlas, utilizing data provided by Latin American governments.

    China also could be using these tax-friendly jurisdictions 
to register companies and save money, with investment then 
actually flowing to Latin America.\37\
---------------------------------------------------------------------------
    \37\ ``China: Going Outside, Round-Tripping and Dollar Diplomacy: 
An Introduction to Chinese Outward Direct Investment,'' Global Insight, 
January 25, 2006; ``World: Chinese ODI in Latin America: A Convergence 
of Interests,'' Global Insight, February 2, 2006.
---------------------------------------------------------------------------
    Non-financial Chinese investment in Latin America has 
focused on the extraction and production of national resources, 
but also has included investment in manufacturing assembly, 
telecommunications, and textiles. Outside of the Caribbean tax 
haven jurisdictions, China's FDI in the region in 2005 was 
concentrated in Mexico ($142 million), Peru ($129 million), 
Brazil ($81 million), Venezuela ($43 million), Panama ($35 
million), and Cuba ($34 million).\38\ Since the entry into 
force of the North American Free Trade Agreement (NAFTA) in 
1994, China has viewed Mexico as an access point to the U.S. 
market, with a number of export assembly plants established in 
the country. In Peru, Chinese investment has been concentrated 
in mining (especially copper) and oil. In April 2007, China's 
Zijin Mining Group agreed to buy a majority share of the UK-
based Monterrico Metals that operates exclusively in Peru, and 
in July 2007, China's Aluminum Corporation of China (Chinalco) 
purchased majority shares in Peru Copper, a Canadian mining 
company, which owns a property that could become one of Peru's 
largest copper mines by 2012.\39\ In Brazil, Chinese investment 
has been concentrated in wood processing, mining, and energy. 
In 2007, China's state-owned steel company, Baosteel, announced 
that it would be a majority partner with Brazil's large mining 
company, Companhia Vale do Rio Doce (CVRD), in building a steel 
plant in southern Brazil.
---------------------------------------------------------------------------
    \38\ He Li, p. 845, utilizing statistics from China's Ministry of 
Commerce.
    \39\ Marco Aquino, ``China Miners Keenly Eyeing Peru Resources,'' 
Reuters News, September 13, 2007.
---------------------------------------------------------------------------
    The visit of Chinese President Hu Jintao to several Latin 
American countries in November 2004 raised expectations of a 
substantial increase in Chinese investment in the region in 
coming years. During a speech to the Brazilian Congress, Hu 
stated that China would invest $100 billion in Latin America 
over the next 10 years. In Argentina alone, he said China would 
invest $20 billion in the next decade. Latin American nations 
welcomed the increase in foreign capital that the Chinese were 
promising, especially since the region was experiencing a slump 
in attracting FDI. Among the investment pledges highlighted in 
the press during President Hu's trip to Latin America were: 
railway, oil exploration, and construction projects in 
Argentina; a nickel plant and oil and gas exploration in Cuba; 
copper mining projects in Chile; a steel mill, railway, and oil 
exploration projects in Brazil; and oil and gas exploration 
projects in Ecuador, Bolivia, and Colombia.
    Chinese promises of such high levels of investment in the 
region have not yet materialized, and likely will total far 
less than the promised $100 billion by 2014. Many of the 
planned projects have not gone forward. At least one Chinese 
official specializing in Latin America maintains that the $100 
billion referred to bilateral trade, not investment.\40\ 
According to some observers, China's inexperience in investment 
abroad, its lack of information about business in Latin 
America, and concerns about the risks of investing in the 
region all combined have limited China's investment in the 
region.\41\
---------------------------------------------------------------------------
    \40\ He Li, p. 846.
    \41\ Claudio Loser, ``The Growing Economic Presence of China in 
Latin America,'' China-Latin America Task Force, Center for Hemispheric 
Policy, University of Miami, December 15, 2006.
---------------------------------------------------------------------------

Energy

    Energy concerns have played a role in China's overtures 
toward Latin America, with the PRC either concluding or 
exploring various energy investments in Brazil, Ecuador, 
Bolivia, Peru, Colombia, and Venezuela, as well as offshore 
projects in Argentina and Cuba. The three major, state-owned 
Chinese energy corporations making Latin American investments 
are the China Petroleum and Chemical Corporation (Sinopec), 
China National Offshore Oil Corporation (CNOOC), and China 
National Petroleum Corporation (CNPC). In April 2006, Sinopec 
signed an agreement with Brazil's Petrobras to build a natural 
gas pipeline linking the northeast and southeast of Brazil. 
Petrobras and CNOOC also reportedly are studying the 
feasibility of joint operations in exploration, refining, and 
pipeline construction around the world. In Cuba, Sinopec has 
focused on onshore oil extraction in Pinar del Rio province in 
western Cuba. In Venezuela, CNPC is partnered with Venezuela's 
state-oil company, PdVSA (Petroleos de Venezuela, S.A.), for 
exploration in development of the Orinoco belt oil reserves. 
Despite these investments in oil production and assets, 
observers point out that China relies relatively little on 
Latin America for oil, which accounts for some 3% of China's 
oil imports, and that while the percentage could rise a bit, it 
is unlikely to change significantly in the future.\42\
---------------------------------------------------------------------------
    \42\ Derek Mitchell and Chietigj Bajpaee, ``China and Latin 
America,'' Background Paper, China Balance Sheet, Center for Strategic 
and International Studies, July 2006.
---------------------------------------------------------------------------
    Some U.S. observers have been particularly concerned about 
China's activities in Venezuela, and question the reliability 
of Venezuela, which supplied over 11% of U.S. crude oil imports 
in 2006, as a major supplier of oil to the United States. They 
are concerned that Venezuela is looking to develop China as a 
replacement market, although Venezuelan officials maintain that 
they are only attempting to diversify Venezuela's oil markets. 
Venezuela exported about 1.4 million barrels per day (bpd) of 
oil to the United States in 2006, almost 64% of its net oil 
exports of 2.2 million bpd. For comparison, Venezuela's oil 
exports to China are far lower, although there is discrepancy 
about the actual level. The U.S. Energy Information 
Administration estimates that Venezuela's oil exports to China 
were about 80,000 bpd in 2006, while figures most often cited 
in the press are that Venezuela exported 150,000 bpd of oil to 
China.\43\
---------------------------------------------------------------------------
    \43\ Energy Information Administration, ``Venezuela, Country 
Analysis Brief,'' October 2007; David Luhnow and Peter Millard, ``How 
Chavez Aims to Weaken U.S.--China to Get Preference with Oil from 
Projects Now Under State Control,'' Wall Street Journal, May 1, 2007.
---------------------------------------------------------------------------
    Venezuela has vowed to increase its oil exports to China to 
1 million bpd by 2011, although energy analysts maintain that 
there are two major difficulties with this ambition. First, 
China does not have the capability to refine Venezuela's heavy 
crude oil, and second, freight costs are high because of the 
large distance between the two countries.\44\ Nevertheless, in 
2006, PdVSA announced that it would buy 18 oil tankers from 
China that would help Venezuela increase its oil exports to 
Asia.
---------------------------------------------------------------------------
    \44\ Andy Webb-Vidal, ``Chavez on Oil Export Mission in China, 
Financial Times, August 24, 2006.
---------------------------------------------------------------------------

Tourism

    Over the past four years, China has designated 16 countries 
in Latin America and the Caribbean as approved destinations for 
Chinese citizens to travel as tourists. Such agreements allow 
the countries to take advantage of the increase in Chinese 
tourist travel worldwide, which is expected to reach 100 
million by 2020. Cuba was the first country in the region to 
receive ADS status in 2003. Since 2005, 15 more countries in 
the region have been designated: Mexico; the South American 
countries of Argentina, Brazil, Chile, Peru, and Venezuela; and 
the Caribbean nations of Antigua and Barbuda, the Bahamas, 
Barbados, Dominica, Grenada, Guyana, Jamaica, Suriname, and 
Trinidad and Tobago. Costa Rica appears to be a likely ADS 
candidate since its 2007 switch in diplomatic relations from 
Taiwan to the PRC. In November 2007, Costa Rica announced that 
some 200 Chinese tour operators would visit the country over 
the next several months as a step toward increasing Chinese 
tourism in the Central American country. While Chinese tourism 
to Latin America to date has not been significant, this could 
change given the recent tourism agreements with the region as 
well as the marketing campaigns undertaken by various nations 
in the region to attract Chinese tourists.\45\
---------------------------------------------------------------------------
    \45\ He Li, p. 848.
---------------------------------------------------------------------------

Analysis

    While many press accounts focus on Latin American countries 
welcoming Chinese trade and investment, this view is not shared 
by all countries in the region. Mexico and many Central 
American countries view China as a competitor, in terms of 
supplying assembled goods to the U.S. market. They fear losing 
their U.S. market share to China. Fear of competition from 
Chinese apparel and textile exports was a major factor for 
Central American nations and the Dominican Republic in 
negotiating the DR-CAFTA agreement with the United States. 
There has also been fear in other Latin American countries 
about the impact of Chinese competition on domestic 
manufacturing sectors. For example, Brazilian manufacturers of 
footwear, toys, textiles, and consumer electronics have 
suffered from competition with China.\46\ Because of the large 
increase in Chinese imports, Brazil is poised to run a trade 
deficit with China in 2007, the first since 2000, which has 
raised considerable concern among Brazilian manufacturers. The 
specter of a flood of Chinese manufactured exports to Latin 
America has led some economists to question the future 
viability for manufacturing in Latin America.\47\ Other 
economists and observers contend, however, that increased 
Chinese trade and investment can act as an engine of growth for 
Latin American economies and could serve as an impetus for 
reform in the region in order to increase the ability to 
compete with Chinese imports.\48\
---------------------------------------------------------------------------
    \46\ Dominguez, p. 30.
    \47\ Maurico Mesquita Moreira, ``Fear of China: Is There a Future 
for Manufacturing in Latin America?'' World Development, Vol. 35, No. 
3, 2006.
    \48\ Economic Commission for Latin America and the Caribbean, 
``Latin America and the Caribbean in the World Economy, 2004-2005 
Trends,'' p. 157; Javier Santiso, ``Can China Change Latin America?'' 
OECD Observer, July 2007; and He Li, p. 852.
---------------------------------------------------------------------------
    As noted above, while China's economic linkages with Latin 
America and the Caribbean have grown considerably in the past 
few years, they represent only a small percentage of the PRC's 
economic linkages worldwide. Moreover, U.S. trade and 
investment with the region continues to dwarf that of China's 
involvement. China's overall trade with LAC grew to about $70 
billion in 2006, representing just 4% of its overall trade. In 
comparison, U.S. trade with Latin America and the Caribbean 
amounted to almost $555 billion in 2006, accounting for about 
19% of U.S. trade worldwide.\49\ Moreover, the United States is 
far more important as a trading partner for the Latin America 
and Caribbean region than China is. In 2006, almost 38% of the 
region's exports were destined for the United States, compared 
to 3.7% destined for China; likewise, over 34% of the region's 
imports were from the United States in 2006, compared to almost 
8% from China.\50\ While China's reported cumulative stock of 
FDI in the region amounted to $11.5 billion in 2005, the 
cumulative stock of U.S. FDI in the region amounted to $366 
billion in 2005, and grew to $403 billion by 2006.\51\ Many 
observers are also skeptical about the prospects of Venezuela 
significantly increasing its exports to China.
---------------------------------------------------------------------------
    \49\ U.S. trade statistics are from the Department of Commerce, as 
presented by World Trade Atlas.
    \50\ Calculations derived from trade statistics presented in: 
International Monetary Fund, Direction of Trade Statistics, 2007 
Yearbook.
    \51\ U.S. foreign investment statistics are from the ``Survey of 
Current Business,'' September 2007, Department of Commerce.
---------------------------------------------------------------------------
    An area in which China's economic overtures toward Latin 
America have been successful is in securing ``market economy 
status,'' a determination which makes it more difficult for a 
country to initiate anti-dumping actions at the World Trade 
Organization.\52\ In recent years, the PRC has secured this 
designation from a number of Latin American countries, 
including Argentina, Brazil, Chile, Peru, and Venezuela.\53\
---------------------------------------------------------------------------
    \52\ The 110th Congress is considering legislation that would make 
it easier to initiate countervailing duties against ``Non-market 
economies.'' Bills include: H.R. 708; H.R. 1229; H.R. 2942; S. 974; and 
S. 364.
    \53\ ``China: Going Outside, Round-Tripping and Dollar Diplomacy: 
An Introduction to Chinese Outward Direct Investment,'' Global Insight, 
January 25, 2006; for information on congressional efforts to make it 
easier to initiate anti-dumping actions against non-market economies, 
see CRS Report RL33536, China-U.S. Trade Issues, by Wayne Morrison.
---------------------------------------------------------------------------

                           FOREIGN ASSISTANCE

    The exact level of China's foreign assistance to Latin 
America and the Caribbean is uncertain, but reportedly the 
region receives about 10% of China's foreign aid worldwide, far 
behind assistance that China reportedly provides to Asia and 
Africa.\54\ Aid to the region appears to focus on bilateral 
assistance rather than through regional or multilateral 
institutions, with the objectives of strengthening diplomatic 
relations and isolating Taiwan.\55\
---------------------------------------------------------------------------
    \54\ Derek J. Mitchell, p. 117; Michael A. Glosny, ``Meeting the 
Development Challenge in the 21st Century: American and Chinese 
Perspectives on Foreign Aid,'' National Committee on United States-
China Relations, August 2006, p. 15.
    \55\ He Li, p. 847.
---------------------------------------------------------------------------
    Particularly in the Caribbean and Central America, China 
has used assistance in recent years as part of its checkbook 
diplomacy to entice countries in the region to switch their 
diplomatic recognition from Taiwan, while a number of countries 
in the region have been adept at playing the two countries 
against each other in order to maximize financial benefits. As 
noted above, Chinese assistance to Dominica and Grenada was 
instrumental in those countries deciding to switch diplomatic 
recognition. Costa Rica was also rumored to have been offered 
substantial assistance, although Costa Rican officials maintain 
the prospect of increase trade and investment was the primary 
rationale for the switch.
    In preparation for the Cricket World Cup 2007 played in the 
Caribbean, China provided assistance and workers to build 
cricket stadiums in Antigua and Barbuda, Grenada, Jamaica, and 
even St. Lucia, which subsequently switched its diplomatic 
recognition back to Taiwan. China also had built a cricket 
stadium in Dominica in 2004.
    China also has provided assistance for housing, education 
(including scholarships as well as the construction of 
schools), health (including the construction of hospitals), and 
other infrastructure such as railways and highways.
    In recent years, China also has provided additional types 
of assistance to the region, including disaster assistance, 
debt forgiveness, and concessional loans. In the aftermath of 
such natural disasters as earthquakes, floods, and hurricanes, 
China often has responded with assistance. For example, China 
provided hurricane reconstruction assistance to Grenada in the 
aftermath of Hurricane Ivan in 2004. In August 2007, China 
provided support to Peru in the aftermath of a devastating 
earthquake in the southern part of that country. While most of 
China's debt forgiveness has been for low-income African 
countries, China announced in July 2007 that it would write off 
over $15 million in debt owed by Guyana, one of the poorest 
countries in the hemisphere.\56\ In terms of concessional 
loans, China's Export-Import Bank provided a $12 million loan 
to Jamaica in the water sector in 2000.
---------------------------------------------------------------------------
    \56\ ``China Cancels Debt Owed by Guyana,'' BBC Monitoring 
Americas, July 11, 2007.
---------------------------------------------------------------------------
    In addition to Jamaica, China has signed concessional loan 
framework agreements with three other countries in the region--
Suriname, Venezuela, and Trinidad and Tobago.\57\ In September 
2007, China announced that it would provide about $530 million 
in favorable loans over three years to Chinese companies 
investing in the Caribbean.\58\
---------------------------------------------------------------------------
    \57\ Paul Hubbard, ``Aiding Transparency: What We Can Lean About 
China Exim Bank's Concessional Loans,'' Center for Global Development, 
Working Paper Number 126, September 2007.
    \58\ ``More Chinese Investment Coming,'' BBC Caribbean, September 
11, 2007.
---------------------------------------------------------------------------
    In early November 2007, China and Venezuela agreed to 
establish a joint development fund (with a $4 billion 
contribution from China and a $2 billion contribution from 
Venezuela) that would be used to finance loans for 
infrastructure, energy, and social projects in both 
nations.\59\
---------------------------------------------------------------------------
    \59\ ``Venezuela, China Govts Create $6 Bln Joint Development 
Fund,'' Dow Jones Newswires, November 6, 2007.
---------------------------------------------------------------------------
    China also has increased student and educational exchanges 
with the region. In 2006, it established the first Confucius 
Institute in the region, in Mexico City, with the goal of 
promoting Chinese language and culture.
    While the lack of data on Chinese foreign assistance going 
to the region makes it impossible to compare Chinese and U.S. 
assistance levels, it is safe to assume that U.S. assistance is 
far greater. Looking at 2005 statistics comparing foreign 
assistance levels from developed countries to Latin America and 
the Caribbean, the United States was by far the single largest 
bilateral donor to the region, accounting for 29% of the $4.6 
billion in bilateral assistance.\60\
---------------------------------------------------------------------------
    \60\ Organization for Economic Cooperation and Development, 
Geographical Distribution of Financial Flow to Aid Recipients, 2001-
2005, 2007, p. 260.
---------------------------------------------------------------------------

             IMPLICATIONS FOR U.S. POLICY IN LATIN AMERICA
                           AND THE CARIBBEAN

    China's increasing linkages with Latin America and the 
Caribbean prompted growing concerns in Congress about China's 
intentions in the region beginning in 2005. House and Senate 
subcommittees held hearings that year on China's role in Latin 
America, while the U.S. China Economic and Security Review 
Commission, established by Congress, held hearings on China's 
global expansion, including in the Western Hemisphere. A flurry 
of other research studies emerged on the issue, examining a 
range of issues related to China's growing involvement in the 
region.
    In congressional testimony and other statements, Bush 
Administration officials have downplayed concerns about 
potential threats to the United States emanating from China's 
engagement with Latin American nations, although they have 
maintained that the United States needs to be watchful of 
China's actions in the hemisphere. In April 2005 testimony 
before the House Subcommittee on the Western Hemisphere, then 
Assistant Secretary of State for Western Hemisphere Affairs 
Roger Noriega stated that ``China's influence in the region is 
minimal today,'' and that while China's presence in the 
hemisphere is growing, ``it is safe to say the United States 
has been and will continue to be the long-term partner of 
preference.'' \61\
---------------------------------------------------------------------------
    \61\ House International Relations Committee, Subcommittee on the 
Western Hemisphere, Hearing on ``China's Influence in the Western 
Hemisphere,'' Serial No. 109-63, April 6, 2005.
---------------------------------------------------------------------------
    At the same hearing, then Deputy Assistant Secretary of 
Defense for Western Hemisphere Affairs Rogelio Pardo-Maurer 
testified that there was no ``evidence that Chinese military 
activities in the Western Hemisphere, including arms sales, 
pose a direct conventional threat to the United States.'' 
Nevertheless, both officials cautioned that the United States 
needed to be aware of China's actions in the region. Noriega 
maintained that the United States would continue to monitor 
China's outreach to Latin America, just as it monitors China's 
outreach around the world. Pardo-Maurer maintained that the 
United States needs ``to be alert to rapidly advancing Chinese 
capabilities, particularly in the field of intelligence, 
communications, and cyber warfare, and their possible 
application in the region.''
    U.S. officials have suggested that Chinese engagement with 
Latin America could lead to increased U.S.-Chinese cooperation. 
At a September 2005 Senate Foreign Relations Committee hearing, 
Principal Deputy Assistant Secretary of State for Western 
Hemisphere Affairs Charles Shapiro maintained that China's 
engagement with the region could ``lead to increased 
cooperation between China, the United States, and other Latin 
American and Caribbean governments on matters affecting 
regional stability, especially terrorism, transnational crime, 
and counternarcotics.'' \62\
---------------------------------------------------------------------------
    \62\ Senate Foreign Relations Committee, Hearing on ``Challenge or 
Opportunity: China's Role in Latin America,'' September 20, 2005.
---------------------------------------------------------------------------
    In April 2006, Assistant Secretary of State for Western 
Hemisphere Affairs Thomas Shannon visited Beijing as part of 
the first U.S. consultations with China on Latin America. Prior 
to the trip, Shannon acknowledged that China ``is an 
increasingly important player'' in Latin America, and that it 
was important for the two countries to ``understand what each 
other is up to in the region.'' He maintained that the United 
States sees ``the region as having achieved a consensus about 
democracy, free markets and protecting the security of the 
democratic state,'' and that the U.S. ``interest is to make 
certain that China respects this larger consensus.'' \63\ 
Shannon described the consultations as constructive and 
positive, with China assuring the United States that it has no 
plans to seek greater influence in the region beyond expanding 
trade.\64\
---------------------------------------------------------------------------
    \63\ Andres Oppenheimer, ``China Likely to Calm U.S. Fears on Latin 
America,'' Miami Herald, April 9, 2006.
    \64\ Tim Johnson, ``China: Our Goal is Economic; Despite 
Strengthening Trade Ties, China Said It Had No Plans to Expand Its 
Influence in Latin America,'' Miami Herald, April 15, 2006.
---------------------------------------------------------------------------
    After several years of increased Chinese engagement with 
Latin America, most observers have concluded that China's 
economic involvement with the region has not posed a threat to 
U.S. policy or U.S. interests in the region. In terms of 
economic, political, and cultural linkages, the United States 
has remained predominant in the region. U.S. trade and 
investment in Latin America dwarfs that of China, while the 
future growth potential of such Chinese economic linkages with 
the region is constrained by the advantages conferred by U.S. 
geographic proximity to Latin America. Moreover, migration 
patterns to the United States from the region give the United 
States greater cultural ties and longer-term economic 
importance to the region than China could ever have. For 
example, remittance flows from the United States to the region 
amounted to $60 billion in 2006--a sum greater than both 
foreign aid and portfolio investment flows to the region, with 
remittances making a significant contribution to the economies 
of several Caribbean and Central American nations.
    In its policy toward Latin America, China has been careful 
not to antagonize the United States in the region, and appears 
to understand that the United States is sensitive to 
involvement in its neighborhood. China has taken a low-key 
approach toward the region, focusing on trade and investment 
opportunities that help contribute to its own economic 
development and managing to avoid public confrontation with the 
United States.\65\ Even Chinese relations with Venezuela are 
focused on oil resources rather than ideological rapport. China 
reportedly does not want to become a pawn in a dispute between 
Venezuela and the United States.\66\ Moreover, China reportedly 
has concerns that Venezuelan President Hugo Chavez's efforts at 
spreading his populist agenda to other countries in the region 
could unleash instability and ultimately be detrimental to 
Chinese trade and investment interests in the region.\67\
---------------------------------------------------------------------------
    \65\ He Li, pp. 854-858.
    \66\ William Ratliff, ``Beijing's Pragmatism Meets Hugo Chavez,'' 
Brown Journal of World Affairs, Winter/Spring 2006.
    \67\ June Teufel Dreyer, ``The China Connection,'' China-Latin 
America Task Force, Center for Hemispheric Policy, University of Miami, 
November 8, 2006.
---------------------------------------------------------------------------
    Nevertheless, other observers contend that China poses a 
potential threat to U.S. influence and interests in the region. 
First, some maintain that by presenting an alternative 
political and economic model--rapid economic growth and 
modernization alongside political authoritarianism--the PRC 
undermines the U.S. agenda to advance political reform, human 
rights and free trade in the region.\68\ According to this 
view, the Chinese model could help strengthen anti-democratic 
and anti-U.S. political leaders and actors in some countries. 
Second, according to some analysts, China's regional presence 
ultimately could have significant strategic implications for 
the United States in the event of a possible military conflict 
with China. In this scenario, China could use its human and 
commercial infrastructure in the region to disrupt and distract 
the United States in the hemisphere. According to this view, 
China's increased presence in the region could also provide the 
country with new opportunities to collect intelligence data 
against U.S. forces operating in the region.\69\
---------------------------------------------------------------------------
    \68\ ``Findings and Recommendations of the China--Latin America 
Task Force, March--June 2006,'' Center for Hemispheric Policy, 
University of Miami.
    \69\ R. Evan Ellis, ``The Military-Strategic Dimensions of Chinese 
Initiatives in Latin America,'' China-Latin America Task Force, Center 
for Hemispheric Policy, University of Miami, February 16, 2007.
---------------------------------------------------------------------------

                   Figure 2. Map of Central America 
                        and the Caribbean Region



            Figure 3. Map of Latin America and the Caribbean



                              ----------                              


                       The Southwest Pacific\70\

---------------------------------------------------------------------------
    \70\ Prepared by Thomas Lum, Foreign Affairs, Defense, & Trade 
Division, with the assistance of Susan Chesser, Knowledge Services 
Group FDT, November 2007.
---------------------------------------------------------------------------

                                OVERVIEW

    The People's Republic of China (PRC) has become a growing 
political and economic force in the Southwest Pacific. Some 
analysts argue that China has begun to fill a vacuum created by 
waning U.S. attention since the end of the Cold War, when USAID 
withdrew its aid missions. By comparison, Australia, Japan, and 
the EU have maintained strong regional presences. In order to 
garner political and economic influence for key objectives, as 
well as to access raw materials, China has expanded its 
diplomatic and commercial activities in the Pacific. By some 
accounts, the PRC has become the third-largest source of 
foreign aid to the South Pacific, which it largely provides 
without the kinds of conditions or performance criteria that 
have engendered resentment among some Pacific Island countries 
toward their major benefactor, Australia. Aid and investment 
from both China and Taiwan, which has diplomatic relations with 
six Pacific Island nations, have generated both appreciation 
and resentment among peoples of the region. Although China's 
influence currently is largely limited to diplomatic and 
economic ``soft power,'' some analysts worry about the PRC's 
long-term strategic intentions.
    The Pacific Islands can be divided into four spheres of 
influence: American, Australian, New Zealander, and French. The 
American sphere extends through parts of Micronesia, in which 
lie two U.S. territories (Guam and the Commonwealth of the 
Northern Mariana Islands) and the Freely Associated States (The 
Republic of the Marshall Islands, the Federated States of 
Micronesia, and the Republic of Palau), as well as Polynesia, 
including Hawaii and American Samoa.\71\Guam and the Northern 
Mariana Islands (CNMI), along with the Freely Associated States 
(FAS), have been regarded as a security border of the United 
States, the defense of which is considered to be key to 
maintaining vital sea lanes in the Pacific. In addition to 
being home to the Reagan Ballistic Missile Defense Test Site at 
Kwajalein Atoll in the Marshall Islands, the FAS are located 
strategically between Hawaii and Guam. According to some 
military experts, the FAS provide a vast buffer zone for Guam, 
which serves as the ``forward military bridgehead'' from which 
to launch U.S. operations along the Asia-Pacific security arc 
stretching from South Korea and Japan, through Thailand and the 
Philippines, to Australia.
---------------------------------------------------------------------------
    \71\ The Freely Associated States are former districts of the 
United Nations Trust Territory of the Pacific, administered by the 
United States. Under the Compacts of Free Association (entered into by 
the United States and the Marshall Islands and Micronesia in 1986 and 
the United States and Palau in 1995), the FAS are sovereign nations but 
the United States is responsible for their security and economic well-
being.
---------------------------------------------------------------------------
    Australia's regional interests focus on the islands south 
of the equator, including the relatively large Melanesian 
nations of Papua New Guinea (PNG) and the Solomon Islands as 
well as Vanuatu. New Zealand has long standing ties with the 
territory of Tokelau, former colony Samoa (also known as 
Western Samoa), and two self-governing but ``freely 
associated'' states, the Cook Islands and Niue. New Zealand 
also has a large native Polynesian population of Maoris as well 
as large numbers of other more recently arrived Pacific 
Islanders. Australia and New Zealand often cooperate on 
regional security matters. France continues to administer 
French Polynesia and New Caledonia. Australia, Japan, New 
Zealand, the United Kingdom, and the United States are the 
major providers of official development assistance (ODA).\72\
---------------------------------------------------------------------------
    \72\ Most U.S. assistance to the region is not development aid but 
rather economic grants provided to the Freely Associated States 
pursuant to the Compacts of Free Association.
---------------------------------------------------------------------------
    Other than Australia and New Zealand, the only Oceanic 
nations with significant defense forces are Papua New Guinea 
and Fiji. Tonga and Vanuatu also have small forces. The United 
States is obligated by treaty agreement to defend the Freely 
Associated States. Several other Pacific states rely upon 
Australia and New Zealand for their external security. In the 
past several years, China has asserted increasing diplomatic 
and economic influence across the entire region, but it lacks a 
regional military role or ``hard power.'' \73\ China's military 
assistance to Pacific countries reportedly is modest--mostly 
training and logistical support rather than weaponry--but 
increasing.\74\
---------------------------------------------------------------------------
    \73\ See Scott Whitney, ``U.S. Pays Little Attention to Asia, Less 
to the Pacific,'' Pacific Islands Report, July 2, 2003. For further 
information, see Henry S. Albinski, ``External Power Engagement in 
Melanesia,'' in Bruce Vaughn, ed. The Unraveling of Island Asia?: 
Governmental, Communal, and Regional Instability, Westport: Praeger, 
2002.
    \74\ Bertil Lintner, ``China's Third Wave, Part 2,'' Asia Times 
Online, April 18, 2007 [www.atimes.com].
---------------------------------------------------------------------------

                               DIPLOMACY

The China-Taiwan Rivalry and ``Dollar Diplomacy''

    Competition for friends among Pacific countries has spurred 
PRC and Taiwanese diplomatic and economic activity in the 
region. While the United States does not maintain an embassy in 
several Pacific Islands countries with which it has diplomatic 
relations, the PRC has opened diplomatic missions in all 
Pacific countries with which it has diplomatic relations and 
has provided bilateral assistance, embarked on high profile 
regional visits, and hosted lavish receptions in Beijing for 
Pacific Island leaders.\75\ Of the 23 countries with which 
Taiwan (or ROC) has diplomatic ties, six are in the Pacific, of 
which two are Freely Associated States.\76\ China and Taiwan 
have become major sources of trade, investment, immigration, 
and tourism in the region.
---------------------------------------------------------------------------
    \75\ China reportedly has more diplomats in the region than any 
other country. Nick Squires, ``Pacific Persuasion,'' South China 
Morning Post, July 21, 2005.
    \76\ Taiwan (ROC) has diplomatic relations with the following 
Pacific Island nations: Kiribati, the Marshall Islands, Nauru, Palau, 
the Solomon Islands, and Tuvalu. China has diplomatic relations with 
Cook Islands, Fiji, Micronesia, Papua New Guinea, Samoa, Tonga, and 
Vanuatu.
---------------------------------------------------------------------------
    The PRC and Taiwan both have begun to develop more 
coordinated diplomatic and economic strategies in the Pacific. 
In April 2006, PRC Premier Wen Jiabao held a summit in Fiji 
(China-Pacific Island Countries Economic Development and 
Cooperation Forum) with members of the principal regional 
organization, the Pacific Islands Forum (PIF). At the meeting, 
China and several PIF countries signed the China-Pacific Island 
Countries Economic Development and Cooperation Guiding 
Framework. Wen reportedly pledged $375 million in development 
assistance and low interest loans as well as the establishment 
of preferential tariffs for Pacific Island goods. The PRC also 
has expressed interest in a free trade agreement with the 
Pacific Island Nations. It was later reported that China had 
allocated $600 million for soft loans for development projects 
in the region.\77\
---------------------------------------------------------------------------
    \77\ ``Fiji to Seek Development Loan from China after Donors 
Threaten to Cut Funding,'' International Herald Tribune, July 5, 2007.
---------------------------------------------------------------------------
    In September 2006, Taiwan President Chen Shui-bian held the 
country's first summit with its Pacific allies, in which Taiwan 
signed agreements on cooperative projects including law 
enforcement, online government, tourism, public health, the 
environment, energy, agriculture and fisheries. Taiwan and the 
six summit participants (the six Pacific Island countries with 
which Taiwan has official relations) signed a ``Palau 
Declaration,'' recognizing Taiwan's achievements in political 
democratization and economic development and supporting 
Taiwan's bid to join the United Nations, World Health 
Organization, and other major international organizations.\78\ 
In October 2007, President Chen visited the Marshall Islands 
for the 2nd Taiwan-Pacific Allies Summit, in a new convention 
center financed by Taiwan.
---------------------------------------------------------------------------
    \78\ Lawrence Cheng, ``Chen Denies Chequebook Diplomacy,'' South 
China Morning Post, September 5, 2006; ``Taiwan Allies Issue Palau 
Declaration,'' PA CNE WS, September 6, 2006; Lilian Wu, ``Too Early to 
Discuss Cost of Projects with Allies: MOFA,'' Central News Agency 
English News, September 5, 2006. In addition to Taiwan, the six 
participants were: Palau, Marshall Islands, Kiribati, Nauru, Solomon 
Islands, and Tuvalu.
---------------------------------------------------------------------------
    China and Taiwan receive direct diplomatic benefits from 
their exertion of soft power. In return for economic aid, 
Beijing and Taipei demand diplomatic recognition and support of 
diplomatic objectives. China insists that its diplomatic 
relations in the Pacific support the ``one-China'' policy, cut 
off contacts with Taiwan, and oppose resolutions in the United 
Nations (UN) that it feels would criticize unfairly China's 
human rights record. Taiwan's Pacific friends support its 
membership in international organizations, including the United 
Nations and the World Health Organization.
    Some experts argue that ``dollar diplomacy''--large amounts 
of unconditional aid in exchange for support on international 
issues--may exacerbate political instability and corruption in 
recipient countries while not leading to broad economic 
development. According to many observers, financial and other 
benefits from Beijing and Taipei may exert undue influence over 
the behavior of Pacific Island leaders who preside over limited 
budgets, or undermine the aid, diplomatic, and political 
efforts of regional powers such as Australia. Some have accused 
the PRC and Taiwan of meddling in the domestic politics and 
elections of several Pacific Islands countries, including Fiji, 
Kiribati, Nauru, the Solomon Islands, and Vanuatu. Both Beijing 
and Taipei have denied using aid primarily to advance 
diplomatic or strategic agendas and have stressed the mutual 
benefits of their Pacific Island relationships. Taiwanese 
officials have stated that their aid programs also involve 
health, education, rural development, and culture.
    Many Pacific Island nations have welcomed the attention, 
aid, and economic support from the PRC and Taiwan. Several of 
these countries, such as Kiribati and Nauru, have switched 
diplomatic alliances more than once reportedly in response to 
enticements of assistance by China and Taiwan.\79\ Some Pacific 
Island leaders argue that foreign assistance is not a ``zero-
sum game'' and that increased aid, trade, and investment from 
the PRC and Taiwan neither exclude the influence of Australia 
and New Zealand nor preclude U.S. re-engagement in the 
region.\80\
---------------------------------------------------------------------------
    \79\ Robert Keith-Reid and Samisoni Pareti, ``China Stirs the Pot 
of Divided Pacific Loyalties,'' Pacific Islands Report, March 16, 2006.
    \80\ ``Chinese Aid Won't Mean Chinese Influence: Sevele,'' Tonga 
Now, May 22, 2007.
---------------------------------------------------------------------------

China, Taiwan, and the Freely Associated States

    The FAS remain under strong U.S. economic and strategic 
influence, despite growing economic assistance and investment 
from China and Taiwan. There appears to be little, if any, 
political pressure within the FAS to alter the economic and 
strategic underpinnings of their relationships with the United 
States. As in other Pacific Islands countries, some citizens in 
the Freely Associated States have expressed concerns about the 
possible adverse effects of PRC and Taiwanese influence.
    Despite the strength of the U.S.-FAS relationships, the 
former Trust Territory districts also have good relations with 
Japan, China, and Taiwan based largely upon foreign assistance 
and commerce. The Compact does not restrict the countries with 
which the sovereign Freely Associated States may have 
diplomatic relations. Micronesia established diplomatic 
relations with China in 1989, while the Marshall Islands and 
Palau recognize Taiwan, for largely economic rather than 
ideological reasons. China is likely one of the largest 
providers of foreign assistance to the Republic of the Marshall 
Islands (RMI), after the United States and Japan, although 
amounts are difficult to determine.\81\ PRC assistance to 
Micronesia has included loans, grants, and the construction of 
government buildings and a sports center. China also maintains 
a large tuna fishing fleet in the country.
---------------------------------------------------------------------------
    \81\ U.S. Government Accountability Office, ``Compacts of Free 
Association: Development Prospects Remain Limited for Micronesia and 
the Marshall Islands,'' June 2006.
---------------------------------------------------------------------------
    The Marshall Islands switched recognition from the PRC to 
Taiwan in 1998. According to the U.S. Government Accountability 
Office, Taiwan is the second largest source of foreign aid to 
the Marshall Islands (about $10 million annually) after the 
United States (Japan is the third largest provider of 
assistance).\82\ Taiwan has pledged $40 million over 20 years 
for the Marshall Islands Trust Fund, which was established by 
the United States and the Marshall Islands as part of the 
amendments to the Compact of Free Association in 2004. A major 
portion--over 50%--of the large businesses reportedly are owned 
by Taiwanese, many of whom are naturalized citizens of the RMI, 
which has caused some concern among the native business 
community.\83\
---------------------------------------------------------------------------
    \82\  Ibid.
    \83\ ``Sale of Biggest Marshalls Business Shows Increasing Taiwan 
Dominance,'' PA CNE WS, October 18, 2005.
---------------------------------------------------------------------------
    Taiwan, which has had diplomatic relations with Palau since 
1999, reportedly ``casts a huge shadow'' over the country's 
economy, with estimates of $100 million in cumulative aid and 
loans, causing some resentment among locals.\84\ Japan is also 
a major aid donor. In addition, Taiwan and Japan are Palau's 
top source of tourists: Taiwan supplied 34,000 tourists or 42% 
of total foreign visitors to Palau, a nation of 20,000, in 
2005.
---------------------------------------------------------------------------
    \84\ Jennings, Ralph, ``Taiwan Patronage Buoys, Irks Ally Palau,'' 
Reuters News, September 6, 2006.
---------------------------------------------------------------------------

                          TRADE AND INVESTMENT

    China is gaining upon the top countries and regions in 
terms of trade and investment in the Southwest Pacific (see 
Table 5). There reportedly are more than 3,000 Chinese state-
owned and private enterprises (including energy production, 
garment factories, fishing and logging operations, plantations, 
hotels, restaurants, and grocery stores) in the Pacific, witha 
total value estimated at between $600 million and $1 
billion.\85\ The governments of the largest Pacific Island 
countries--Papua New Guinea (PNG), Fiji, and the Solomon 
Islands--have welcomed investment from China or Taiwan as part 
of their ``look north'' foreign policies. Papua New Guinea 
(PNG) and the Solomon Islands, whose exports of wood to China 
grew by 26% and 29% respectively in 2006, run large trade 
surpluses with the PRC. PRC investments in PNG include the $1 
billion Ramu nickel mine, logging, gas production, and tuna 
processing. Chinese demand for timber reportedly has fueled 
large-scale illegal logging in Indonesia and Papua New 
Guinea.\86\ China operates a large tuna fishing fleet in Fijian 
waters and has agreed to help develop a hydro power plant in 
the country.
---------------------------------------------------------------------------
    \85\ Kalinga Seneviratne, ``South Pacific: China Seen As 
Alternative to Big-Brother Aussies,'' Inter Press Service, April 17, 
2006; Alphonse Muapi, ``Investment Grows,'' Business News, April 6, 
2006.
    \86\ ``China's Demand for Timber is Destroying Forests in 
Indonesia, PNG, Says Greenpeace,'' Associated Press, April 17, 2007.
---------------------------------------------------------------------------
    The PRC government has designated seven western Pacific 
nations--those with which it has diplomatic relations--as 
``approved tourist destinations'' and pledged to encourage 
Chinese tourists to visit the region, despite the relatively 
high costs for Chinese travelers to fly there. China is the 
only non-Pacific Island nation to be a member of the South 
Pacific Tourism Organization (SPTO). In 2005, the SPTO 
estimated that 45,000 Chinese tourists would visit the region 
by 2007.\87\
---------------------------------------------------------------------------
    \87\ SPTO Press Release, ``SPTO Identifies Significant Growth in 
Tourism from Chinese Arrivals,'' May 17, 2005.

                   Table 5. Total Trade (Imports + Exports) Between Pacific Island Countries, the World, and Selected Countries, 2006
                                                                      ($ Millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            New       United
                                                                   World     Australia    Japan      EU-25      China     Zealand     States     Taiwan
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fiji...........................................................      2,200         467        101        210         69        281        206         13
Kiribati.......................................................         70          21          5         2*          1          4          3        n/a
PNG............................................................      6,270       3,011        656        570        518        113        132         57
Samoa..........................................................        430          83         26         10         13         65         23         20
Solomon........................................................        460          62         41         20        130         14          9        0.5
  Islands......................................................
Tonga..........................................................      15011           9         20          4         37         20          1
Vanuatu........................................................        520          53         80          0         19         22         11         .5
--------------------------------------------------------------------------------------------------------------------------------------------------------
  Totals.......................................................     10,100       3,708        918        832        754        536        404         92
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: IMF, Direction of Trade Statistics Quarterly, 2007.
* = 2005

                              FOREIGN AID

    According to some experts, the PRC has become the third-
largest source of foreign aid to the South Pacific. In terms of 
official development assistance (ODA), the main form of 
assistance provided by the major donors in the region, China 
provides relatively little aid. (See Table 6.) However, the PRC 
administers a wider range of assistance that includes non-
development aid, loans, and trade and investment agreements. 
According to some analysts, when these kinds of assistance are 
added, China becomes a major donor in the region.
    China's foreign aid to the Southwest Pacific, like its aid 
to many other regions, is difficult to quantify due to a lack 
of data and to the unique characteristics of Chinese 
assistance. Furthermore, because China offers assistance 
without the conditions that other donors frequently place on 
aid (i.e. democratic reform, market opening, and environmental 
protections), it often garners appreciation disproportionate to 
the size of its aid, and thus can have a large impact on 
recipient governments.\88\ China's policy of ``non-interference 
in domestic affairs'' often wins friends not only among Pacific 
governments but also by many peoples in the region because it 
is regarded as respectful of their countries' sovereignty. Such 
aid, announced at lavish receptions with toasts to the 
recipient countries, also carries great symbolic value.\89\
---------------------------------------------------------------------------
    \88\ China's conditions on aid are often international rather than 
domestic--requiring aid recipients to support the ``one-China'' 
principle regarding Taiwan and China's agenda in the United Nations.
    \89\ Jane Perlez, ``China Competes with West in Aid to its 
Neighbors,'' The New York Times, September 18, 2006.
---------------------------------------------------------------------------
    Many PRC aid projects, such as government buildings, public 
facilities, and infrastructure, often built by Chinese 
companies, are high profile efforts that primarily benefit 
capital cities or the governments in power. Many foreign aid 
experts, non-governmental organizations (NGOs), and local 
groups have criticized Chinese aid for not promoting 
widespread, sustainable development and for exacerbating 
official corruption. Recent Chinese aid and funding projects in 
the region include government buildings in Samoa, a sports 
stadium in the Cook Islands, infrastructure in Niue, and 
reconstruction efforts in Tonga following the riots and 
destruction of 2006.

Aid to Fiji

    In response to the December 2006 military coup in Fiji, the 
United States and other powers in the region imposed sanctions. 
The United States suspended military aid to the country worth 
$729,000 in 2006 pursuant to Section 508 of the Foreign 
Operations Appropriations Act.\90\ The Australian government 
suspended foreign assistance with the exception of health, 
education, and community development programs and aid to the 
apparel and textile sectors. New Zealand suspended aid, defense 
ties, and sporting contacts.
---------------------------------------------------------------------------
    \90\ ``U.S. Cuts Aid to Fiji Army,'' Pacific Islands Report, 
December 20, 2006; U.S. Suspends $3M in Military Aid,'' Fiji Times, 
December 21, 2006.

                             Table 6. Official Development Assistance to the Pacific
----------------------------------------------------------------------------------------------------------------
                                                                 Net Official      Estimated
                                           Major Official        Development     Foreign Aid as    U.S. foreign
                          Population   Development Assistance     Assistance       Percent of       assistance
                                          (ODA) Donors \1\        (2005)  $     Recipients' GDP     (2006)  $
                                                                   million            \2\            million
----------------------------------------------------------------------------------------------------------------
Cook Islands...........        21,000  Italy, New Zealand,              32.0*              7.0               --
                                        Australia.
Fiji...................       906,000  EC, Australia, Japan..            64.0              3.0              2.5
Kiribati...............       105,400  Japan, Australia, EC..            28.0             22.0              1.3
Marshall Islands.......        60,400  United States, Japan..            57.0             35.0             31.0
Micronesia.............       108,000  United States, Japan..           106.0             37.0             70.0
Nauru..................        13,287  Australia, Japan, New              9.0             33.0               --
                                        Zealand.
Niue...................         2,166  New Zealand, Australia            21.0             26.0               --
Palau..................        20,579  United States, Japan..            23.0             13.5             30.0
Papua New  Guinea......     5,670,544  Australia, Japan......           266.0              9.6              0.3
Samoa..................       176,908  Japan, Australia......            44.0              7.5              1.4
Solomon Islands........       552,438  Australia, EC, New               198.0             42.0              0.2
                                        Zealand.
Tonga..................       114,689  Australia, Japan, New             32.0              7.7              1.7
                                        Zealand.
Tuvalu.................        11,810  Australia, EC, New                 9.0             85.0               --
                                        Zealand.
Vanuatu................       208,869  Australia, France, New            39.0             11.0              2.2
                                        Zealand.
----------------------------------------------------------------------------------------------------------------
  Totals...............     7,972,090    ....................           928.0                             140.6
----------------------------------------------------------------------------------------------------------------
Sources: CIA, The World Factbook, 2007; Organization for Economic Cooperation and Development (OECD).
* 2006
\1\ OECD members only.
\2\ Foreign Aid as a percentage of GDP based upon World Factbook ``economic aid'' figures (2004) and nominal GDP
  data.
Note: China does not provide official data on foreign aid. According to some sources, Taiwan is a top provider
  of foreign assistance to the Marshall Islands while China is a major source of aid to Papua New Guinea.

    The EU suspended all non-humanitarian aid and threatened to 
suspend assistance for the Fijian sugar industry to offset the 
phase-out of EU price supports for imported Fijian sugar. 
However, Fiji reportedly has sought a loan of up to $600 
million from China if other aid sources are cut. The PRC 
government promised that its aid programs in Fiji would 
continue despite the coup, stating that ``the political 
situation is an internal matter for the country.'' \91\
---------------------------------------------------------------------------
    \91\  ``Envoy Stresses Fiji Still Eligible for Chinese Aid,'' BBC 
Monitoring Asia Pacific, August 20, 2007; ``Fiji to Seek Development 
Loan from China after Donors Threaten to Cut Funding,'' Associated 
Press Newswires, July 5, 2007.
---------------------------------------------------------------------------

                       PACIFIC VIEWS TOWARD CHINA

Pacific Chinese

    The ethnic Chinese population in the Pacific Island region 
is economically influential but remains relatively small 
numerically. Estimates of the ethnic Chinese population in the 
Pacific (including French Polynesia and the U.S. territories), 
range from 80,000 to over 200,000, or between 1% and 3% of the 
total population. These estimates are based upon data that 
generally do not break down ethnic Chinese populations by place 
of origin.\92\ There reportedly has been an influx of Chinese 
in the two largest Pacific Island nations, Papua New Guinea and 
Fiji (with an estimated 20,000 Chinese in each country), along 
with reports of illegal immigration and ethnic Chinese 
involvement in organized criminal activity, including illegal 
drugs, gambling, prostitution, and money laundering. However, 
according to other experts, the PRC government has no 
systematic policy to populate the islands and ``no real need'' 
to bolster its influence through such a policy. Rather, Chinese 
immigrants in Pacific Island communities often complicate PRC 
relations in the region by creating resentment among indigenous 
citizens toward Asians in general or Chinese in particular. 
Furthermore, some argue, Chinese populations in the Pacific are 
not monolithic--they include ethnic Chinese from China, Hong 
Kong, Taiwan, and elsewhere in Southeast Asia as well as 
Pacific Islanders of Chinese descent who have resided and 
intermarried in the Pacific region since the 19th century. 
Where these ethnic Chinese populations originally came from and 
how long they have been in their Pacific Island habitats 
generally are determining factors in how these ethnic 
populations view China and Taiwan.
---------------------------------------------------------------------------
    \92\ Penny Spiller, ``Riots Highlight Chinese Tensions,'' BBC News, 
April 21, 2006 and ``The Pacific Proxy: China vs. Taiwan,'' PA CNE WS, 
February 9, 2007.
---------------------------------------------------------------------------

Anti-Ethnic-Chinese Riots

    PRC and Taiwanese engagement in the region, coupled with 
the ethnic-Chinese economic presence, while often welcomed by 
Pacific Island Nation governments, has engendered some 
resentment among indigenous peoples. In some cases, public 
anger against the national government has spilled over into 
anti-ethnic-Chinese activity. In November 2006, riots broke out 
in Tonga's capital, Nuku'alofa, in which at least eight people 
died and three-quarters of the commercial district were 
destroyed, including 30 Chinese-owned businesses. More than 70% 
of Nuku'alofa's grocery stores are owned by newly-arrived 
migrants from China, according to one report.\93\ The riots 
were sparked by anger over the perceived slow pace of political 
reforms following the death in September 2006 of King 
Taufa'ahau Tupou IV, and reflected frustration over political 
and economic privileges enjoyed by the hereditary nobility, 
unemployment and the reduction of civil service jobs, and the 
growth of ethnic Chinese-owned businesses.\94\ Estimates of the 
ethnic Chinese population in Tonga, many of whom are Tongan 
citizens, range from 1,000 to 4,000 persons. Australia and New 
Zealand sent 85 and 70 troops and police, respectively, to help 
restore order and enforce martial law. Although stability was 
restored, Tongan opposition groups criticized the foreign 
troops as backing an undemocratic government.\95\ Approximately 
200 300 Chinese nationals returned to China on an airplane 
chartered by the PRC government.
---------------------------------------------------------------------------
    \93\ Lintner, op. cit.
    \94\ ``Not So Friendly--Tonga,''  The Economist, November 25, 2006.
    \95\ Pesi Fonua, ``Tonga Gets Outside Help after Riots,'' 
Associated Press, November 19, 2006; Dan Eaton, ``Stop Backing Regime, 
Troops Told,'' The Press (New Zealand), November 22, 2006; Peter Lewis, 
``Australian Troops Go `Softly Softly','' Australian Broadcasting 
Corporation, November 23, 2006.
---------------------------------------------------------------------------
    In April 2006, an estimated 1,000 political demonstrators, 
rioters, and looters clashed with police and set buildings on 
fire in the business district of Honiara, the capital of the 
Solomon Islands, where there is a concentration of ethnic 
Chinese-owned businesses. Among the demonstrators' charges was 
that both the former and newly-appointed governments were 
corrupt and unduly influenced by local Chinese business 
interests and Taiwan government money or ``assistance.'' The 
ethnic Chinese community in the country is estimated to total a 
few thousand,'' with about 2,000 in Honiara. Most ethnic 
Chinese in the Solomon Islands reportedly are from Hong Kong, 
Singapore, Indonesia, and Malaysia or are naturalized third or 
fourth generation Solomon Islanders, with no links to Taiwan.
    Taiwan, which has diplomatic relations with the Solomon 
Islands, reportedly provides $11 million in annual assistance 
to the SI and has been accused of exacerbating corruption 
there.\96\ Taiwanese officials denied that they had ``bought'' 
any influence in the election of Snyder Rini to be Prime 
Minister in 2006. The PRC evacuated 300 Chinese nationals 
during the upheaval. Australia and New Zealand, which together 
had approximately 300 military troops and police officers 
already stationed in the country, a legacy of the 2003 peace-
keeping mission established to help quell ethnic violence, sent 
additional personnel.\97\
---------------------------------------------------------------------------
    \96\ Ashley Wickham, ``Taiwan Payments Cloud Solomons Democracy,'' 
Pacific Islands Report, May 19, 2006; Alfred Sasako, ``Taiwan Fund 
Secrecy Dangerous for Solomons,'' Pacific Islands Report, March 30, 
2006.
    \97\ The Regional Assistance Mission to the Solomon Islands 
(RAMSI).
---------------------------------------------------------------------------

               IMPLICATIONS FOR U.S. POLICY IN THE REGION

    According to some experts, unconditional and unregulated 
foreign aid and business investment from China and Taiwan--
provided without goals related to democracy, sustainable 
development, fair working conditions, and the environment--may 
exacerbate underlying political, economic, and social problems 
in the Southwest Pacific. Others argue that, on the whole, 
assistance from the PRC and Taiwan has benefited the region. 
Some specialists contend that China has devised a comprehensive 
strategy to gain strategic influence in the Pacific within the 
context of U.S. neglect. However, others counter that China's 
main objectives in the region are to check and reverse Taiwan's 
diplomatic inroads and to garner influence but not replace the 
United States as the foremost military power.
    Many regional specialists argue that the United States 
should pay greater attention to or more directly engage Pacific 
Islands countries, many of which are plagued by weak political 
institutions, civil unrest, and persistent poverty. Some 
analysts argue that addressing these issues would not only help 
promote political stability and economic development but also 
enhance U.S. security interests and counter possible adverse 
effects of China's growing influence. In May 2007, the Bush 
Administration may have signaled a move toward greater or 
renewed involvement in the region when it declared 2007 the 
``Year of the Pacific'' at the eighth Pacific Islands 
Conference of Leaders.\98\
---------------------------------------------------------------------------
    \98\ The Pacific Islands Conference of Leaders (PICL) is a 
triennial meeting of Pacific states and territories sponsored by the 
East-West Center, an education and research organization established by 
the U.S. Congress in 1960 to strengthen relations and understanding 
among the peoples and nations of Asia, the Pacific, and the United 
States.
---------------------------------------------------------------------------

                 Figure 4. Map of the Southwest Pacific





              Source: Map Resources. Adapted by CRS. 06/07

    The conference, held in Washington, D.C. for the first 
time, was attended by Secretary of State Condoleezza Rice. 
Among the main topics, aims, and initiatives under discussion 
were: expanding public diplomacy efforts through a new public 
affairs office in Fiji; strengthening the Joint Commercial 
Commission; Pacific fisheries management; the U.S. military 
expansion in Guam and its impact on the region; global warming 
and rising sea levels; and establishing a regular U.S.-Pacific 
Islands dialogue. Other proposals included: enhancing 
educational and cultural exchanges; expanding foreign aid 
grants in the area of democracy-building; more fully utilizing 
the Generalized System of Preferences (GSP) program; and 
creating more welcoming business environments.\99\
---------------------------------------------------------------------------
    \99\ U.S. Department of State, ``U.S. Engagement in the Pacific 
Islands Region: 2007 Pacific Islands Conference and Core Partners 
Meeting,'' Fact Sheet (Revised), May 8, 2007.

                              ----------                              


                       Japan and South Korea\100\

---------------------------------------------------------------------------
    \100\ Prepared by Dick Nanto, Foreign Affairs, Defense, & Trade 
Division, November 2007.
---------------------------------------------------------------------------

                                OVERVIEW

    In Northeast Asia, China's rise and its soft power are 
causing fundamental changes in its relations with Japan and 
South Korea. Both of these countries have well-developed, 
democratic political systems, industrialized economies, export 
oriented businesses, a well-educated populace, and relatively 
high income levels. As such, they differ from certain 
developing nations that may not be as well prepared to cope 
with the growing influence of China and its use of soft power 
to pursue its national interests.
    Another difference with Japan and South Korea is that soft 
power relations are mutual, much as they are between the United 
States and China. While China's economic reach is affecting 
policies in Tokyo and Seoul, the economic and cultural 
influences of Japan and South Korea also are affecting policies 
in Beijing.
    As neighboring countries in Northeast Asia, Japan and South 
Korea's relations with China after World War II and the Korean 
Conflict have developed from open warfare to a period of 
frigidity during the Cold War that was interrupted by 
occasional chinook winds that warmed temperatures temporarily. 
During the Cold War, bilateral security ties between the United 
States and Japan and also with South Korea established pathways 
for economic and cultural flows. Each of these countries came 
to rely heavily on the U.S. market and viewed the United States 
as its role model and provider of security in a hostile 
regional environment.
    Currently, Northeast Asia is undergoing a tectonic shift in 
relations between China and both of its formerly hostile 
neighbors. The countries have entered into a new era in which 
the economic benefits of trade, tourism, investment, and 
cultural flows may be gradually overcoming the inertia of long 
harbored feelings of enmity, even though ``history issues'' 
still pop up at times and pour cold water on warming 
relationships. Globalization is creating interdependence in 
Northeast Asia in which domestic and global affairs have become 
inseparably intertwined.
    Trade flows, in particular, have forged the way for 
rapprochement along political pathways. Japan and South Korea 
gradually are turning from the United States toward the Chinese 
economy for exports, imports, and for other interaction, but 
the United States still plays a key role in the region because 
of its military and economic might.

                       INTERNATIONAL TRADE FLOWS

    Figure 5 shows Japan's imports of merchandise (not adjusted 
for inflation) from China and the United States over the 1995-
2006 period. Whereas in 1995, Japan's imports from the United 
States were twice those from China, by 2006 nearly the opposite 
was the case. The shape of the lines in Figure 5 create an 
``ominous X'' that illustrates the rise of China's economic 
power and shift by Japan toward China and away from the United 
States as a source of imports. The intersection point for this 
``ominous X'' occurred in 2002. The crossing of these lines may 
or may not portend future difficulties for the United States, 
but it may challenge long held assumptions regarding the 
dependency of Japan on the United States.

 Figure 5. Japan's Merchandise Imports from the United States and China





                 Source: Data from Global Trade Atlas.

  Figure 6. Japan's Merchandise Exports to the United States and China





                 Source: Data from Global Trade Atlas.

    Figure 6 above compares Japan's exports of merchandise (not 
adjusted for inflation) to China with those to the United 
States. In Japan's exports, the ``ominous X'' has not yet 
appeared, but the trends point toward a possible intersection 
point in the future. Japan's exports to China are rising faster 
than those to the United States. Whereas in 1995, Japan's 
exports to the U.S. market were 450% more than those to China, 
by 2006 they were 57% more. The gap has been narrowing, and in 
the first eight months of 2007, Japan's exports to the United 
States were only 11% more than those to China. At this pace, 
the ``ominous X'' may occur in 2008 or soon thereafter.
    With South Korea, the story is similar. As shown in Figure 
7, an ``ominous X'' appears as South Korean imports of 
merchandise from China exceeded those from the United States in 
2004. Although Korean imports from the United States continue 
to increase, those from China have increased more rapidly. 
Korea now imports 30% more from China than it does from the 
U.S. market.
    For South Korean merchandise exports, the pattern is the 
same. As indicated in Figure 8, the intersection of the 
``ominous X'' occurred in 2003. South Korean exports to the 
U.S. market continue to rise gradually, but those to China are 
rising faster. In 1995, South Korean exports to the United 
States were nearly double those to China. In 2006, South Korean 
exports to China were 60% greater than those to the United 
States, although some of those exports were components and 
materials for manufacturing plants in China that export the 
finished products to the United States.

Figure 7. South Korea's Merchandise Imports from the United States and 
                                 China



                 Source: Data from Global Trade Atlas.

  Figure 8. South Korean Merchandise Exports to the United States and 
                                 China



                 Source: Data from Global Trade Atlas.

    With respect to China's overall export markets, Figure 9 
shows China's exports of merchandise (not adjusted for 
inflation) to the United States, Japan, South Korea, and to the 
Rest of the World. China's exports overall are rising rapidly. 
As for the destination of those exports, China's exports to the 
United States have been rising as a share of total exports 
while the share going to Japan has been falling. China is 
becoming less dependent on exports to the Japanese market and 
more dependent on sales to the United States, even though Japan 
is becoming more dependent on China for its imports (Figure 9). 
This is an example of how soft power generates diverse results. 
China is becoming less dependent on Japan as an export market, 
but Japan is becoming more dependent on imports from China.

             INVESTMENT, FINANCIAL, AID, AND CULTURAL FLOWS

    Much of the trade between China and Japan and South Korea 
is related either to investments made in China by Japanese or 
South Korean companies or through a supply chain in which 
business transactions tend to be relational--conducted between 
buyers and suppliers with established business relationships. 
Foreign invested companies, moreover, account for more than 
half of China's exports of manufactured goods. Foreign direct 
investment has contributed greatly to Chinese economic 
development and plays an important role in drawing countries in 
Northeast Asia closer together.

Figure 9. China's Exports to the United States, Japan, South Korea and 
                         the Rest of the World



                 Source: Data from Global Trade Atlas.

    Figure 10 shows the stock of foreign direct investment 
(FDI) in China by the United States, Japan, and South Korea. In 
1995, the United States and Japan each had about $18 billion in 
FDI in China. South Korea had about a third as much. By 2005 
the amounts invested for the United States at $48 billion and 
for Japan at $47 billion had more than doubled and still were 
similar. South Korea's FDI in China at $26 billion was smaller 
but had more than quadrupled. Chinese data provide a somewhat 
different picture of this investment. For 2005, China reported 
the stock of FDI from the United States to be less ($30.6 
billion) than that in the UN database, but from Japan ($65.3 
billion) and from South Korea ($51.7 billion) the Chinese 
figures are higher. The Chinese figures are for utilized FDI. 
According to Beijing, both Japan and South Korea have 
significantly more FDI in China than does the United 
States.\101\ By sector, Japan's FDI in China is primarily in 
the manufacture of motor vehicles, machinery and equipment, and 
electronic equipment, as well as in wholesale and retail trade, 
construction, transportation, and finance.\102\
---------------------------------------------------------------------------
    \101\ A considerable amount of the FDI in China flows through third 
parties such as Hong Kong and off-shore tax havens such as the Bahamas, 
Virgin Islands, Cayman Islands, Bermuda, and Western and Eastern Samoa. 
Also, some FDI may originate from companies abroad that are affiliated 
with U.S. companies but not counted as such.
    \102\ UN Trade and Development Agency. WID Country Profile: Japan.
---------------------------------------------------------------------------

         Figure 10. Foreign Direct Investment in China by the 
                 United States, Japan, and South Korea



Source: Data from United Nations Trade and Development Agency. Chinese 
              data from China Statistical Yearbook, 2006.

    In private financial flows, Japan has invested or loaned 
considerable sums to Chinese entities. Figure 11 shows 
consolidated claims by Japanese banks on Chinese borrowers as 
well as portfolio investments in Chinese securities by Japanese 
investors. In 2006, Japanese bank claims totaled $17.6 billion 
while portfolio investments were $4.1 billion. (Comparable data 
for South Korea were not available.)
    In development assistance and other foreign aid, the flows 
in Northeast Asia go from Japan to China and not the other way 
around. China also does not provide official development 
assistance (ODA) to South Korea and vice versa. Japanese ODA to 
China began as a form of reparations to compensate for Japan's 
actions in World War II. Japan's ODA disbursements to China 
declined after China's nuclear tests in 1993-94, rose in 1998 
and 1999 then fell again before recovering by 2005.

Figure 11. Japan's Portfolio Investments in and Banking Claims (Loans) 
                                on China



     Source: Data from Bank for International Settlements and the 
                      International Monetary Fund.

    Over the 2004-2005 period, Japan was the top donor of 
official development assistance to China with an average of 
$1.7 billion per year in gross ODA disbursements. This was more 
than four times that of the next larger donor, Germany ($470 
million) and far more than that of France ($164 million). In 
total ODA, China traditionally has been the largest recipient 
of Japan's foreign aid, but in recent years Iraq has taken the 
number one position with an average of $2.1 billion per year in 
2004-2005. This arguably is a temporary exigent situation. 
Japan's aid to India also is increasing as India has become 
another rising power.
    Figure 12 shows gross ODA disbursements by Japan to China 
along with Japan's commitments by sector for the ODA it was 
providing. Japan's aid to China is noteworthy because it shows 
how soft power goes both ways. By sector, economic 
infrastructure, which dominated Japan's aid in 1995, accounted 
for only a small proportion of ODA commitments in 2005. The 
major increase has been in aid for social infrastructure and 
services--70% of which went for water and sanitation projects.

Figure 12. Japan Gross ODA Disbursements and ODA Commitments by Sector 
                                to China



     Source: OECD, Development Database, Country Reporting System.

    Also increasing has been aid for multi-sector projects. 
These primarily have been for environmental protection, for 
support of organizations with interest in Japan, and for 
training and education. Japan provides about 90% of its 
official aid to China in soft loans rather than grants or 
technical assistance.\103\
---------------------------------------------------------------------------
    \103\ Organisation for Economic Cooperation and Development. 
Development Database (CRS).
---------------------------------------------------------------------------
    Japan has begun to use its aid to China to accomplish 
broader political and diplomatic goals. Following the 1989 
Tiananmen Square incident in Beijing and the 1995 Chinese 
nuclear test, Japan temporarily cut off grant aid to China. In 
the past, Japanese aid has been tied to its exports, but as 
Figure 12 illustrates, social infrastructure and services now 
dominate recent ODA commitments. Japan funnels some of its aid 
funds to pro-Japanese non-governmental organizations in China. 
Some in Japan have been questioning the need for continued ODA 
to a country that now is an aid provider and who is seen by may 
Japanese as a regional economic and strategic competitor.\104\ 
One suggestion has been to cut off all aid to China in 2008 
when Beijing hosts the Olympic games. In September 2007, Japan 
and China met to discuss China's aid to African countries. 
Japan requested that China disclose more information about the 
aid it is providing to countries such as Sudan.\105\
---------------------------------------------------------------------------
    \104\  Emily Parker. ``Japan's Development Aid to China: The Long-
running Foreign Policy of Engagement.'' Far Eastern Economic Review, 
June 2006, Vol. 169, pp. 55-56.
    \105\  ``Japan, China Discuss Cooperation on Aid for Africa.'' BBC 
Monitoring Asia Pacific, London: September 18, 2007, pg. 1.
---------------------------------------------------------------------------

 Figure 13. Tourist Visits: Japan, South Korea, and the United States 
                               with China



 Source: China Statistical Yearbook/2006, Japan Tourism Marketing Co., 
                   U.S. Bureau of Economic Analysis.


    In the cultural and social area, China also is drawing 
closer to Japan and South Korea. For example, as shown in 
Figure 13, there were about 3.5 million tourist visits to China 
by both Japanese and South Koreans in 2005--more than twice the 
1.6 million visits by Americans. South Koreans, in particular, 
are traveling to China in record numbers. Tourist visits from 
China are less frequent, but are rising. In 2006, there were 
811,000 Chinese tourist visits to Japan and 320,000 such visits 
to the United States. As with trade flows, tourist visits 
illustrate the growing soft power ties between China and 
northeast neighboring countries compared with such visits 
between the United States and China.
    Despite all the economic, cultural and political 
interaction in Northeast Asia, in 2007 China, Japan, and South 
Korea in 2007 still harbor overall negative attitudes toward 
each other. A 2007 Pew Research Center survey of global 
attitudes indicated that 67% of Japanese expressed an 
unfavorable view of China--comparable to but down from the 71% 
recorded in 2006. Among Chinese, 71% expressed an unfavorable 
view of Japan--little changed from the 70% in 2006.\106\ (See 
Figure 14) These were more negative than Chinese unfavorable 
views of the United States (57%) and considerably worse than 
the unfavorable views of South Korea. In both China and Japan, 
South Korea is viewed favorably by about 60% of those surveyed.
---------------------------------------------------------------------------
    \106\ Pew Research Center.``Publics of Asian Powers Hold Negative 
Views of One Another,'' September 21, 2006, and ``Global Unease With 
Major World Powers,'' June 27, 2007.
---------------------------------------------------------------------------

       Figure 14. Chinese, Japanese, and South Korean Attitudes 
                        Toward Each Other, 2007



     Source: Pew Research Center. The Pew Global Attitudes Project.

    For China and Japan, each country still appears to have 
some distance to travel before underlying attitudes become 
favorable toward each other. In this sense, soft power by both 
nations appears to be changing underlying attitudes only very 
slowly as measured by survey research. By way of comparison, 
China views the United States more favorably than it does 
Japan. The same also holds of Japan's views of the United 
States which were 61% favorable. Despite the growing linkages 
between China and South Korea, the people in South Korea still 
indicated that they had a more favorable view of the United 
States than of China.

                      CHINA'S RELATIONS WITH JAPAN

    The bilateral relationship between China and Japan is 
shifting dramatically. As indicated above, there is growing and 
consistent interaction at the human and economic level shaded 
by bouts of political friction and historic tension as well as 
occasional naval tensions. As depicted in Figure 15, beginning 
at the human and individual level, the temperature of 
interaction is mixed. Communication and cultural exchanges tend 
to be warm, but historical disputes dating back before World 
War II have fanned nationalistic sentiments in China and riled 
the Chinese people. These disputes include Japan's role in 
World War II atrocities such as the Nanking Massacre, as well 
as disputes over visits by certain Japanese politicians to the 
Yasukuni Shrine in which war dead, including some war 
criminals, are enshrined.

    Figure 15. Temperature, Strata of Interaction, and Influence in 
       Relations Between the People's Republic of China and Japan



                Source: Congressional Research Service.


    At the economic and financial level, however, relations are 
hot. These comprise the bulk of interaction, are self 
motivating, and take place without much official notice or 
fanfare. Japan's economic recovery has been maintained partly 
by exports to China, and Japan's businesses have incorporated 
China as an important manufacturing platform for their 
products. Japan now trades as much with China as it does with 
the United States. Statements by both Beijing and Tokyo 
indicate the desirability of mutually beneficial trade. The two 
nations also have been cooperating more in addressing 
environmental and energy problems.
    At the diplomatic and political level, Sino-Japanese 
relations are tepid--not warm but not cold either. China is 
supplanting Japan as the leader in Asia, and Japan is having to 
cede diplomatic territory to Beijing. Many in Tokyo are taken 
aback at what they consider to be high handed actions by 
Chinese leaders and their use of historical animosities that 
many in Japan feel are generated by the government-controlled 
Chinese press and educational system.\107\ The two countries 
had no visits by top leaders for five years after 2001 
primarily because of China's objections to visits to the 
Yasukuni Shrine by former Prime Minister Junichiro Koizumi. In 
October 2006, former Prime Minister Shinzo Abe began his 
administration with a trip to China (and South Korea), and on 
December 27, 2007, Japan's Prime Minister, Yasuo Fukuda, made 
his own visit to China in which the two sides pledged closer 
cooperation on trade, climate change, and other issues. To 
date, however, the warming ties have not brought a change in 
China's opposition to Japan's bid for a permanent seat on the 
United Nations Security Council.\108\
---------------------------------------------------------------------------
    \107\ Interviews by the author in Tokyo, January 2005.
    \108\ ``More on Japan, China Agree to Build Strategic Ties,'' Kyodo 
News Service, Tokyo, April 11, 2007.

    Taiwan in Japan-China Relations.--The Japan-Taiwan-China 
triangle poses a vexing dilemma for both Beijing and Tokyo. 
Japan's relations with Taiwan have been close since Taiwan, 
then known as Formosa, was a Japanese colony for a half century 
until the end of World War II. In 2005, 1.4 million Taiwanese 
visited Japan, and 1.2 million Japanese visited Taiwan. Trade 
and investment relations are also strong, but the two-way trade 
of $60 billion in 2006 is only about a third the size of 
Japan's two-way trade with China. The October 2006 joint 
communique for former Prime Minister Abe's visit to China did 
not mention the Taiwan issue. Beijing reportedly requested that 
the communique include the phrase that ``Japan opposes Taiwan 
independence.'' Japan, however, states that its policy is in 
line the 1972 Japan-China Joint Communique that recognizes 
Beijing as the only legitimate Chinese government. In a 
subsequent visit to Japan by China's Premier Wen Jiabao in 
April 2007, Abe reportedly stated that ``Japan does not support 
Taiwan independence.'' \109\
---------------------------------------------------------------------------
    \109\ ``Abe, Wen Agree on Ways to Realize Mutually Beneficial 
Ties,'' Jiji Press English News Service, Tokyo, April 11, 2007. Also 
see: CRS Report RL33436, Japan-U.S. Relations: Issues for Congress, 
coordinated by Emma Chanlett-Avery.
---------------------------------------------------------------------------
    In 2005 in a joint statement on their common strategic 
objectives, the United States and Japan stated that a common 
strategic objective was to ``encourage a peaceful resolution of 
issues concerning the Taiwan Strait through dialogue.'' \110\ 
This was a rare statement by Japan of its interest in stability 
across the Strait and was viewed in Beijing as ``brazenly 
interfering in China's internal affairs.'' \111\ In the May 
2007 joint statement of the U.S.-Japan Security Consultative 
Committee, however, there was no mention of Taiwan.\112\
---------------------------------------------------------------------------
    \110\ U.S. Department of State. ``Joint Statement of the U.S.-Japan 
Security Consultative Committee,'' Washington, DC, February 19, 2005.
    \111\ Xinhua Daily Telegraph as cited in U.S. Department of State, 
INR, ``Issue Focus: U.S.-Japan Joint Security Statement: Concerns over 
an `Emerging China.' '' February 24, 2005.
    \112\ U.S. Department of State. ``Joint Statement of The U.S.-Japan 
Security Consultative Committee.'' May 1, 2007.
---------------------------------------------------------------------------
    Japan and China also share an interest in halting North 
Korea's nuclear program and in maintaining stability in the 
region. Each participates in the various regional institutions 
and summits that have arisen in East Asia. These include the 
East Asia Summit, the ASEAN Regional Forum, ASEAN + 3, APEC, 
and the Six-Party Talks dealing with the North Korean nuclear 
program.
    At the military level, relations are cold as both countries 
seek to establish their claims to offshore islands and energy 
resources in neighboring seas. Japan is watching the Chinese 
military buildup with apprehension, and China fears that the 
U.S.-Japan alliance may bring Japan into any outbreak of 
hostilities that China may have with the United States over the 
status of Taiwan.
    A Japanese observer of major trends sees China as the 
single most formidable challenger to Japan. Although private 
economic relations are thriving, he sees rising friction at the 
government level. The two countries maintain a type of ``cold 
peace,'' as China matures and attempts to reclaim its position 
in the world.\113\
---------------------------------------------------------------------------
    \113\ Tomohiko Taniguchi. ``Major Trends in Japan.'' Slide 
presentation, December 2004.
---------------------------------------------------------------------------
    In Japan, economics and politics always have mixed. In many 
respects, the U.S. nuclear umbrella has allowed the country to 
pursue ``checkbook diplomacy'' by which Tokyo has used its 
trade, aid, and investments alongside of the strengthening of 
its military to develop what they have called comprehensive 
security. Japanese experience in the 1980s showed that while 
economic interdependence may not deflect trade and political 
friction, it puts incentives in place to resolve disputes 
amicably. Economic and financial relations formed a base from 
which Japan could approach diplomatic, political, and security 
relations with other states.\114\
---------------------------------------------------------------------------
    \114\ Ron Matthews. ``Business Focus Turning Point for Japan,'' 
Jane's Defence Weekly, May 29, 1993.
---------------------------------------------------------------------------
    For both Japan and China, one key question is to what 
extent the extensive economic interactions and diplomatic 
sensibilities will prevent political tension from escalating 
into outright hostility or even military conflict. Stronger 
economic, financial, and cultural ties between the two 
countries increase the potential costs of bilateral friction or 
of regional instability. In a sense, what is evolving is a type 
of economic realpolitik. Although each country uses its soft 
power to attempt to influence the other, in essence, each 
country appears to have warmed toward the other because of 
practical and material factors. In short, economic interaction 
appears to have induced the two sides to keep the nationalist 
rhetoric to a manageable level and adroitly tiptoe around 
potential military clashes. Chinese influence in Japan is 
growing as China rises to become a major regional power. On the 
other hand, Japanese influence in China also is growing as the 
Beijing leaders come to rely more on delivering growth and 
prosperity to underpin their claim to legitimacy.

                   CHINA'S RELATIONS WITH SOUTH KOREA

    The relationship between China and South Korea (The 
Republic of Korea or ROK) provides a model for how deepening 
economic relations can bring two capitals together politically. 
Figure 16 outlines the major strata of interaction, channels of 
influence, and the temperature of relations between the PRC and 
South Korea. Beginning at the bottom of the figure, as is the 
case with Japan, the major daily interaction is in 
communications and cultural interchanges while disputes over 
historical issues occasionally cloud the relationship. At the 
human and individual level, the temperature of relations is 
mixed with rising warmth in cultural exchanges and 
communications but occasional cooling in nationalistic 
disputes. Cultural ties have also increased multifold: tourism 
in both directions has increased markedly, and the number of 
South Korean students studying Mandarin has skyrocketed. 
Historical ties between China and South Korea are not as 
fraught as those between China and Japan, but disputes still 
surface.

    Figure 16. Temperature, Strata of Interaction, and Influence in 
    Relations Between the People's Republic of China and South Korea



                Source: Congressional Research Service.


    The temperature of economic and financial relations has 
been hot as China has displaced the United States as South 
Korea's major trading partner, and South Korean businesses have 
moved labor-intensive production processes to Chinese 
factories. Each economy has grown increasingly dependent on the 
other for trade and investments. In 2006, South Korea exported 
$69.4 billion in goods to China, $43.2 billion to the United 
States, and $26.5 billion to Japan, while importing $51.9 
billion from Japan, $48.6 billion from China, and $33.6 billion 
from the United States.\115\
---------------------------------------------------------------------------
    \115\ Global Trade Atlas. Note that some South Korean exports to 
China are components for finished products that are than exported to 
the United States.
---------------------------------------------------------------------------
    At the diplomatic and political level, relations have 
generally been warm (cordial) since the normalization of ties 
in 1992, but disputes over treatment of North Korean refugees 
seeking passage through China and other issues have sometimes 
cooled relations. Frequent reciprocal visits by top officials 
have solidified the political relationship, and cooperation in 
attempting to resolve the North Korean nuclear crisis has 
gained Beijing further favor in Seoul.
    Korea's history with China is not always viewed as a 
positive influence on contemporary diplomatic and political 
relations. In 2004, in a move that diminished its ``image'' in 
South Korea, China sparked a major political dispute. The flap 
arose because of a PRC claim that the Koguryo Kingdom (37 B.C.-
668 A. D.) was a part of Chinese territory and history, not, as 
Koreans claim, an independent Korean entity that produced many 
of Korea's long-standing traditions. Angry reaction in South 
Korea came from many quarters, including the public, members of 
the National Assembly from both parties, and the Ministry of 
Foreign Affairs and Trade. Many claimed that the controversy 
exposed Beijing's ``hegemonic ambitions,'' and erased an 
earlier impression of China as a benevolent economic 
partner.\116\ Officials on both sides scrambled to calm the 
controversy and Beijing dispatched Vice Minister Wu Dawei, 
former ambassador to South Korea, to negotiate a resolution. 
The resulting five-point agreement soothed Korean concerns at 
least temporarily. With the North Korea problem still at a 
sensitive stage, government officials were relieved to patch up 
the relationship. Still, the incident exposed strong underlying 
sentiment in both populations and could indicate a shift away 
from the cozy political relationship the two capitals have 
enjoyed for over a decade since normalization.
---------------------------------------------------------------------------
    \116\ Scott Snyder, ``A Turning Point for China-Korea Relations?'' 
Comparative Connections, 3rd Quarter 2004.
---------------------------------------------------------------------------
    At the military and security level, relations are cool, but 
warming. Despite China's intervention in the Korean conflict 
(1950-53) and alliance with North Korea, security relationships 
between Seoul and Beijing are improving. In 1999, China and 
South Korea agreed to hold annual discussions on regional 
security issues.\117\ China holds a large wild card in the 
security relationship because of its influence with Pyongyang. 
Similar to Japan, however, South Korea also is concerned about 
the potential adverse behavior of China two or three decades 
into the future when it is expected to achieve major power 
status. South Korea also has turned a cautious eye toward 
China's increasing trade with and investments in North Korea. 
While South Korean investment in North Korea have been confined 
to specific enclaves, China's businesses are allowed to invest 
in existing enterprises. China's companies seem to be viewed as 
less threatening to the North Korean socialism than those from 
South Korea or other nations with market-oriented economies.
---------------------------------------------------------------------------
    \117\ James A. Foley, ``China Hedges Its Bets on North Korea,'' 
Jane's Intelligence Review, November 1, 2004.
---------------------------------------------------------------------------
    The threat of instability posed by the North Korean nuclear 
program has induced the major powers in the region to cooperate 
in bringing Pyongyang to the negotiating table. These Six-party 
Talks build on common security and economic interests and have 
brought the governments of China and South Korea into a loose 
partnership. Both countries oppose the development of a nuclear 
arms program by North Korea. Each fears the consequences of a 
collapsed Kim Jong-il regime in Pyongyang which could create 
instability on the peninsula and a flood of North Korean 
refugees. Because Japan generally has hewed closely to what 
(until 2007) had been a more hardline U.S. position, Seoul and 
Beijing found themselves advocating a similar approach of 
engagement and laying out in explicit terms what Pyongyang 
could gain if it abandoned its nuclear weapons program. 
Observers note the irony that with respect to the North Korean 
nuclear issue, China's relations with the DPRK have become 
somewhat of a burden for Beijing while their ties with South 
Korea have become more economically beneficial.
    As in the case with Japan, the U.S.-South Korean military 
alliance weighs heavily on the growing ties between Beijing and 
Seoul. In essence, both have been able to deepen the economic 
relationship with full knowledge that the United States also 
seeks stability in Northeast Asia. China and South Korea's 
cautious political alignment on the Six-party Talks has taken 
place, however, as cracks began to appear in the U.S.-South 
Korea alliance.
    However, both Washington and Seoul policymakers insist that 
the alliance is strong as evidenced by Korea's support of the 
Iraq war and by statements by President Lee, Myung-bak in 2008 
indicating that unlike the previous Roh administration, his 
would ``work to develop and further strengthen traditional 
friendly relations with the United States into a future-
oriented partnership.'' \118\ Under former President Roh, Moo-
hyun, South Korea did respond to Washington's request to send 
troops to Iraq to perform humanitarian work, but his 
administration attempted to pursue a geopolitical strategy of 
seeking to play the role of a balancing force and 
transportation hub in Northeast Asia. Apparently, many in South 
Korea wanted the country to act as a stabilizer for peace and 
prosperity and to place exchanges with China at the same level 
as those with Japan or the United States--despite concerns that 
this strategy implied a shift toward China.\119\ The strategy 
stemmed partly from the increased economic traffic in the 
peripheral countries around China, partly from the chronic 
tension between Seoul and Tokyo, and partly as an attempt by 
South Korea to define itself in a region that increasingly was 
becoming dominated by China. For some in South Korea, however, 
even though China looked like an appealing alternative when 
relations with the United States wavered, they did not have to 
search far into the past to see that China had a history of 
shifting alliances--not to mention its entry into the Korean 
War in 1950 that ultimately preserved the division of the 
peninsula.
---------------------------------------------------------------------------
    \118\ Norimitsu Onishi. ``At swearing-in, Lee highlights U.S. ties 
He calls for pragmatism over ideology in dealings with North and 
Washington,'' International Herald Tribune, Paris: February 26, 2008, 
pg. 1.
    \119\ Sung-kyoo Ahn. ``Security Aide Explains Vision of Balancer 
Role.'' Seoul JoonAng Ilbo (Internet version). April 14, 2005. 
(Reported by Open Source Center) ``Seoul Downgrading U.S. Alliance in 
Favor of Closer Military Ties with China, Russia.'' East-Asia-Intel.com 
(subscription e-mail service), April 12, 2005. ``ROK Presidential 
Committee Head Views ROK's `Balancing Role' in Northeast Asia.'' Chosun 
Ilbo (Internet Version in Korean), April 12, 2005. (Translated by Open 
Source Center).
---------------------------------------------------------------------------
    Expert studies also point to the growing strength of the 
economic relationship in Chinese foreign policy. One expert 
concludes that since successful implementation of reform and 
open-door measures for China requires stability, Beijing has 
few options other than to pursue a pragmatic diplomatic policy 
rooted in economic benefits, although clearly China shows no 
intention of compromising or negotiating over matters related 
to its sovereignty. In this respect, China regards peace and 
stability on the Korean peninsula as indispensable to its 
continued economic advancement. It seeks to preserve the 
Pyongyang regime while taking measures to resolve the North 
Korean nuclear problem. Also, the talk of reunification between 
South and North Korea places pressure on Beijing to keep on the 
good side of South Korea to avoid the prospect of a nuclear-
armed, unified Korea as an unfriendly neighbor. The PRC also 
would like to wean South Korea away from its close military 
alliance with the United States in order to weaken what it 
views as an important link in the U.S. ``encirclement'' of 
China. Beijing, therefore, has placed great importance on its 
economic and trade relations with South Korea while maintaining 
its support of Pyongyang and expanding diplomatic and political 
contacts with Seoul.\120\
---------------------------------------------------------------------------
    \120\ Kim, Taeho. The Rise of China and Korea's Strategic Outlook. 
Korea Focus, 10 (3), May-June 2002, p. 79-81.
---------------------------------------------------------------------------

                      REGIONAL TRADE ARRANGEMENTS

    In almost no other area is competition between China and 
Japan for soft power influence in Northeast Asia manifested 
more clearly than in the emerging economic architecture of the 
region. The two countries are in a type of tug-a-war over who 
will be the lead country in Asia. During the 1980s, Japan 
claimed the lead based on its industrial prowess, export 
successes, and its democratic political institutions. Japan, 
however, could rely on the United States to maintain security 
in the region. Now China is wresting the lead from Japan, and 
China's new strength is being manifest in the manner in which 
various regional trade and political/security arrangements are 
evolving.
    The growing economic interaction and interdependency in 
Northeast Asia are leading to a spate of preferential trading 
arrangements that also have spawned nascent regional economic 
and political arrangements. This process is being helped along 
by China's increasing diplomatic prowess and a rush by Japan 
and South Korea to negotiate free-trade agreements of their own 
so as not to place their exporters at a competitive 
disadvantage. In an ironic twist, the rivalry between China and 
Japan for leadership in building the new Asian economic and 
security architecture has enabled the Association of Southeast 
Asian Nations (ASEAN) to step forward and serve as the 
organizing hub and as the nucleus for the resultant trade and 
security structure.\121\ ASEAN is seen as a neutral party in 
the Sino-Japanese rivalry.
---------------------------------------------------------------------------
    \121\ The Association of Southeast Asian Nations or ASEAN was 
established on August 8, 1967 in Bangkok by the five original member 
countries: Indonesia, Malaysia, Philippines, Singapore, and Thailand. 
Brunei Darussalam joined in 1984, Vietnam in 1995, Laos and Burma/
Myanmar in 1997, and Cambodia in 1999.
---------------------------------------------------------------------------
    In 1992, ASEAN created an ASEAN Free Trade Area among its 
member nations. This has become the base for a number of 
arrangements with the neighboring countries in Asia. In 2002, 
China signed an FTA (Framework Agreement) with ASEAN that would 
create a zero-tariff market for China and the six original 
ASEAN members by 2010 and in 2015 for the other four members. 
This included an early harvest program that eliminated tariffs 
on goods. Japan and South Korea followed with FTAs with ASEAN 
of their own. Each country also is negotiating bilateral FTAs 
with individual countries within A SEAN and with each other. In 
addition, each country either has concluded or is negotiating 
bilateral FTAs with numerous other countries both in Asia and 
around the world. Meanwhile, the United States has concluded a 
bilateral FTA with Singapore, has completed negotiations on the 
Korea-U.S. FTA, and is still negotiating a FTAs with Thailand 
and Malaysia.
    For the future regional architecture in East Asia, China, 
Japan, South Korea, ASEAN, and the United States each seem to 
have competing visions, national interests, and long-term 
strategies. Each is using its soft power to pursue its own 
goals. The underlying questions with regard to the regional 
architecture include: (1) who takes the lead--China, Japan, the 
United States, or ASEAN; (2) should the Asian regional 
organizations be confined to East Asia, or should they include 
South Asia, Australasia, Russia, and even extend across the 
Pacific to include countries of the Americas; and 3) how deep 
should integration go? Is the ultimate goal something akin to 
the European Community?

Competing Visions for East Asia

    China's vision for East Asia appears to be to establish 
itself as the leading regional power and to attain a status in 
the world community of nations commensurate with its position 
as one of the five permanent members of the United Nations 
Security Council, a nuclear power, a successful explorer of 
outer space, and the country with the world's largest 
population. China sees a U.S. decline as the corollary to its 
rise and seeks to displace Japan as the economic leader of East 
Asia.\122\ China's strategy seems to be to foster favorable 
conditions for continuing its modernization while also reducing 
the perception that its arrival as an industrial power and 
political force threatens the interests of others. China needs 
peace and stability in the region while it grows and resolves 
numerous internal economic, political, and social problems. 
Beijing recognizes that the United States is perhaps the only 
power that can thwart its plans to bring Taiwan under its 
sovereign control or can impose a system of economic sanctions 
that could cripple its economic--and military--ascent. Beijing 
has preferred an exclusive East Asian regional organization 
that would enable it to take the lead and place the United 
States and Japan in secondary roles. Paramount in China's 
vision is a region in which countries respect what it considers 
to be its territorial integrity, allow for flows of trade and 
investment necessary to sustain its high rates of growth, and 
not interfere with what it considers to be its internal 
affairs.
---------------------------------------------------------------------------
    \122\ See, for example: Shen Qiang. ``New Developments in Evolving 
Relationships among Major Powers,'' International Strategic Studies, 
3rd Issue, 2005, p. 54.
---------------------------------------------------------------------------
    Japan's vision for East Asia is one in which the United 
States continues to provide a nuclear umbrella for the region 
and in which Tokyo relies on its economic power and diplomatic 
skills to exercise leadership. It seeks to be a ``normal'' 
nation without vestiges of its defeat in World War II, 
particularly the self-maintained constraints on its military. 
Japan would like to bury its World War II history and be viewed 
as a peaceful nation and a force for betterment in Asia through 
economic progress. Prior to the resurgence of China, Japan 
characterized the countries of East Asia as flying in a wild 
geese migrating pattern with Japan playing the role of the lead 
bird. Tokyo recognizes now that Beijing is rapidly assuming the 
leadership role in East Asia and that the Chinese economy is 
becoming the regional center of gravity for trade and 
investment activity. Japan, however, would like to maintain a 
position of leadership in Asia, accommodate China's resurgence 
without tinges of vassalage, and continue to be at the 
forefront in economic and financial affairs.
    For South Korea, the vision for the region is one in which 
South Korea is a hub for transportation and economic activity. 
With a relatively small economy when compared with those of 
Japan and China and historical enmity against Japan, South 
Korea has been cultivating relations with China while seeking 
to strengthen its economic and security ties with the United 
States. South Korea claims Japan has not offered to open its 
agricultural market enough to continue negotiating a bilateral 
free trade agreement. South Korea also views North Korea, the 
other half of the Korean peninsula, as a possible partner in 
manufacturing and a unified North and South Korea as a bulwark 
against competition from China. South Korea also seeks a 
nuclear-free Korean peninsula.
    For the United States, the vision for the region begins 
with its preeminent position as a keeper of the peace, a 
wellspring for economic prosperity, an advocate for open 
markets, and a role model for social, cultural, and political 
values. Its goals in East Asia are to prevent any other single 
power from dominating Asia, to maintain stability, to increase 
access to markets in the area, to encourage development of 
democratic institutions, and to protect basic human rights. The 
United States shares leadership with other nations and 
institutions and does not need to have a seat at the table each 
time Asians meet. Washington, however, usually seeks a presence 
when decisions are made affecting its vital interests in East 
Asia (but it sometimes is absent--as in the inaugural meeting 
of the East Asia Summit). The strategy of the United States in 
the region has been to continue its hub and spoke system with 
the United States being the hub and bilateral FTAs and security 
arrangements spoking out with Asian nations. The United States 
also has multilateral relationships with links to regional 
organizations or sets of countries such as APEC (the 21-nation 
Asia Pacific Economic Cooperation forum) and the proposed Free 
Trade Area of the Asia Pacific (FTAAP) that calls for an APEC-
based trans-Pacific FTA.\123\ The United States also recognizes 
that cooperation with China, Japan, and South Korea are 
essential to resolving vital security issues, such as the North 
Korean nuclear threat. Furthermore, the United States would 
like a more balanced trading relationship with Asian nations. 
In 2007 the United States incurred a merchandise trade deficit 
of $256 billion with China, $83 billion with Japan, and $13 
billion with South Korea (43% of the total U.S. trade deficit 
of $816 billion). These three countries also hold more than a 
trillion dollars in U.S. Treasury securities.\124\
---------------------------------------------------------------------------
    \123\ See: CRS Report RL31038, Asia Pacific Economic Cooperation 
(APEC) and the 2007 Meetings in Sydney, Australia, by Michael F. 
Martin.
    \124\ U.S. Treasury Department. ``Major Foreign Holders of Treasury 
Securities,'' December 2007. (Japan--$581.2 billion, China--$477.6 
billion, South Korea--$39.2 billion) See also: CRS Report RL34319, 
Foreign Ownership of U.S. Financial Assets: Implications of a 
Withdrawal, by James K. Jackson and CRS Report RL34314, China's 
Holdings of U.S. Securities: Implications for the U.S. Economy, by 
Wayne M. Morrison and Marc Labonte.
---------------------------------------------------------------------------

Shifting Regional Groupings

    These alternate visions are played out in attempts at use 
of soft power as a tactic to pursue strategic visions or goals 
by the countries competing for traction in Asia. In regional 
trade, China has promoted the ASEAN + 3 arrangement in which 
the ASEAN-10 countries join with China, Japan, and South Korea 
in what could lead to an East Asian trading bloc that would 
exclude the United States. The ASEAN + 3 Unit has been 
organized and helps coordinate the activities of the group. It 
is located within the ASEAN Secretariat. The ASEAN + 3 group 
holds its annual summit immediately following the ASEAN summit. 
It has focused on trade facilitation, establishing 
institutional structures for financial and monetary 
cooperation, and on being a forum for discussing political and 
security matters. Beijing apparently views ASEAN +3 as an 
institution in which it can take the lead without competition 
from the United States or Europe or the dilution of East Asian 
interests by India or Australia.
    In 2006, Japan proposed a 16-nation East Asian Free Trade 
area to be coordinated by an organization similar to the 
Organization for Economic Cooperation and Development (OECD). 
The 16 nations would include the ten members of the Association 
of Southeast Asian Nations, Japan, China, South Korea, India, 
Australia, and New Zealand, identical to the membership of the 
East Asia Summit.\125\ This larger grouping would dilute the 
influence of China in the proposed free trade area.
---------------------------------------------------------------------------
    \125\ ``Japan Aims to Launch East Asia FTA Talks in `08,'' Jiji 
Press English News Service, Tokyo: April 4, 2006.
---------------------------------------------------------------------------
    Japan's concept was welcomed by ASEAN and India, but China 
and South Korea indicated that their first priority would be 
the ASEAN + 3 FTA proposal.\126\ U.S. Ambassador to Japan 
Thomas Schieffer has expressed some concern about the proposed 
Asia FTA saying it could damage U.S. interests in the region. 
He said that the United States is uncomfortable ``when people 
start talking about somehow trying to exclude the United States 
from Asia.'' The United States has tremendous interests there 
and wants to be a part of Asia, he remarked.\127\
---------------------------------------------------------------------------
    \126\ ``S. Korea, China Snub Japan's 16-nation FTA Plan,'' 
Organisation of Asia-Pacific News Agencies, August 24, 2006.
    \127\ ``US Envoy Expresses Concern About Japan's Idea of East Asia 
Free Trade Zone,'' BBC Monitoring Asia Pacific, London: April 19, 2006.
---------------------------------------------------------------------------
    At the 2006 Leader's Meeting of the Asia-Pacific Economic 
Cooperation forum the APEC members decided to study the 
possibility of a Free Trade Area of the Asia Pacific (FTAAP). 
This trans-Pacific FTA was promoted by the United States and 
would encompass the 21 APEC economies and include the ASEAN-6 
plus Vietnam, China, Chinese Taipei (Taiwan), Hong Kong, Japan, 
and South Korea in Asia; the United States, Canada, Mexico, 
Peru, and Chile in the Americas; Australia, New Zealand, and 
Papua New Guinea in the Pacific; and Russia.\128\ As a start, 
the United States has begun talks with the P4 (New Zealand, 
Singapore, Brunei, and Chile) to possibly join that FTA with 
the aim toward using that as a base for creating an FTA that 
spans the Pacific Ocean. These actions reflect the U.S. 
strategy of creating a trans-Pacific trading bloc rather than 
one dominated by China or Japan. The FTAAP also addresses the 
U.S. concern that Taiwan not be shut out of any emerging Asian 
free trade area.
---------------------------------------------------------------------------
    \128\ Asia Pacific Economic Cooperation, ``14th APEC Economic 
Leaders' Meeting, Ha Noi Declaration.'' Ha Noi, Viet Nam, 18-19 
November 2006. For information on APEC, see: [http://www.apec.org].
---------------------------------------------------------------------------
    One issue in Asia that differentiates the Chinese from the 
U.S. approach to FTAs is the U.S. insistence on a ``gold 
standard'' template that provides for elimination of all 
tariffs and addresses other barriers to economic interaction 
such as liberalizing investment flows, enforcing intellectual 
property rights, and increasing access for providers of 
services. The purpose of this ``gold standard'' is to 
eventually combine bilateral FTAs into regional FTAs that 
include the United States and to avoid what is being called the 
``spaghetti bowl'' of intertwining and overlapping free trade 
agreements each with its own rules and special exceptions. This 
helps U.S. companies to compete in this new world of disparate 
sets of trading rules that are not necessarily convergent. U.S. 
adherence to this ``gold standard,'' however, often creates ill 
will as the United States is perceived to be excessively 
intrusive in requiring reforms in FTAs. The Chinese approach is 
to sidestep controversial issues (such as imports of rice) and 
to maximize the good will aspects of FTAs. The Japanese 
approach is somewhere in between the two extremes with 
scrupulous avoidance of any opening of rice markets but 
amenable to most other types of market liberalization.
    Chinese recent economic and diplomatic successes, however, 
should not be over emphasized. The United States still is the 
world's preeminent military and economic power, and while many 
global supply chains include China, they also include the 
United States--particularly in product design, technology, and 
marketing. Asian nations are seeking to broaden international 
options with major powers, and they engage in a continuing 
round of hedging and maneuvering for advantage and against 
possible Chinese dominance. In this process, they are seeking 
closer ties with each other and also with the United 
States.\129\
---------------------------------------------------------------------------
    \129\ Robert Sutter. ``China's Rise: Implications for U.S. 
Leadership in Asia,'' East-West Center Washington, Policy Studies, Vol. 
21, 2006. p. vii-ix.
---------------------------------------------------------------------------

                 IMPLICATIONS FOR U.S. POLICY IN REGION

    The extent to which China relies on soft power in Northeast 
Asia is different from that in either Southeast Asia or in 
Africa and Latin America. China, Japan, and South Korea tend to 
be peer competitors in trade and business relationships. Each 
is jockeying for position and using the tools of soft power in 
trying to influence each other and other countries in the 
region. With trade and investments, though, international 
interaction cuts both ways. Japan and South Korea are clearly 
more dependent on China, but China also is more dependent on 
Japan and South Korea. A question is whether this economic 
interdependence combined with other interaction is having an 
effect on political relationships, or whether the opposite is 
the case--whether increased political and diplomatic relations 
are affecting trade and investment flows.
    One economic study examines this question through use of an 
econometric technique to test causality in the relationship 
between trade and political conflict among China, Japan, and 
the United States. Conflict in the study is defined as an 
unfriendly or negative political action or stance of one 
country towards another (an index of cooperation minus 
conflict). The study found that in the 1990-97 period, Japanese 
net cooperation towards China was positively affected by 
Japan's growing importance to China. In the 1998-2004 period, 
Japanese net cooperation towards China was negatively affected 
by China's growing exports to Japan as China's dominance grew 
and became more visible. The study also found that growing 
Chinese exports to Japan and to the United States were causing 
a rise in the measure of negative sentiment towards China, but 
for Japan the growth of exports to China seems to dampen this 
effect. The large imbalance in trade with the United States, 
however, was causing tensions to rise in the United States. The 
study concluded that the stable and rapidly growing economic 
relationship constrained antagonistic political behavior 
between China and Japan. The authors of the study conclude, 
``The rising interdependence between the nations and 
concomitant opportunity cost of serious conflict has led to an 
easing of political tensions and even some movement towards 
increased cooperation. The structure of the political 
relationship appears likely, from this analysis, to be 
increasingly affected by the economic relationship.'' \130\
---------------------------------------------------------------------------
    \130\ Peter Drysdale and Shiro Armstrong, ``The Effects of Politics 
on Trade and Trade on Politics, Japan and China,'' pg. 25. Paper 
presented at the Japan Economic Seminar, Washington, DC, November 16, 
2007.
---------------------------------------------------------------------------
    This study reinforces intuitive notions that increasing 
interdependence and interchange between nations leads to a 
lessening of tensions, unless the interdependence or 
interchange is viewed as being tilted in favor of the other 
party. This implies for China that its ``charm offensive'' and 
soft power are likely to improve political relations with a 
trading partner unless a large trade surplus in its favor 
appears. Then the increased economic interaction is likely to 
raise political conflict. In short, China may be gaining 
friends now, but those friendships could sour later if the 
economic interaction becomes unbalanced. By that time, however, 
structures and institutions could be in place that solidify a 
Chinese position of power.
    To many observers, the policy implications for the United 
States call for continued and reinvigorated U.S. engagement in 
East Asia to counter Chinese soft power and active 
participation in building the economic and political/security 
architecture of the region. With Japan and South Korea, much of 
Chinese soft power actually is being generated by Japanese and 
South Koreans, themselves, through trade and investment flows. 
Among these countries, soft power effects go both ways. 
Although unlikely at this time, an East Asian organization 
similar to the Chinese dominated Shanghai Cooperation 
Organization is clearly not in the U.S. interest. The current 
U.S. hub and spoke strategy of negotiating free trade 
agreements and security arrangements with individual countries 
in Asia is one way to ensure that the U.S. presence remains 
strong, but the U.S. insistence on ``gold standard'' provisions 
in its bilateral FTAs that require major changes in domestic 
laws has caused resentment when compared with China's ``non-
interventionist'' approach.
    Japanese and South Korean soft power in their dealings with 
China may work to the U.S. advantage in raising the costs of 
instability and rash military actions (such as conflict over 
Taiwan) in East Asia. Despite the growing economic and 
financial interaction, however, considerable distrust (stemming 
from historical issues) still exists between China and Japan 
and between Japan and South Korea. Currently, the probability 
that a Northeast Asian trading bloc combining the economies of 
China, Japan, and South Korea seems small, since those 
countries have not made much progress on bilateral FTAs with 
each other. If such a trading bloc were to emerge, however, 
this could pose a significant challenge for the United States. 
Currently, the three countries account for 43% of the U.S. 
merchandise trade deficit and hold over a trillion dollars in 
U.S. Treasury securities in their foreign exchange reserves.

                 Figure 17. Mainland China, Japan, and 
                        South Korea in East Asia



             Source: Adapted by CRS. Map Resources (11/07).

                              ----------                              


                           Central Asia\131\

---------------------------------------------------------------------------
    \131\ Prepared by Jim Nichol, Specialist in Russian and Eurasian 
Affairs, Foreign Affairs, Defense, and Trade Division.
---------------------------------------------------------------------------

                                OVERVIEW

    After the Soviet breakup, China focused on establishing 
trade and other cooperative relations with the newly 
independent Central Asian states and encouraging their efforts 
to ensure regional and border security.\132\ The new 
geopolitical situation permitted China to largely demilitarize 
its borders with the new states, opened markets for Chinese 
goods and investment, yielded better access to raw materials, 
provided economic opportunities for China's Xinjiang Uighur 
Autonomous Region, and promised to reinstate Central Asia as a 
transit corridor (``Silk Road'') between China and Europe and 
between China and the Middle East. The Soviet collapse also 
confronted China with several security challenges, including 
growing contacts between separatists in Xinjiang and their 
supporters in Central Asia, the growth of Islamic extremism in 
Central Asia, rising instability or even state failure in the 
region, the possibility of the development of ties between the 
Central Asian states and Taiwan, and Central Asian regional 
cooperation that excluded China.\133\
---------------------------------------------------------------------------
    \132\ As discussed here, Central Asia consists of the former Soviet 
republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and 
Uzbekistan.
    \133\ Ablat Khojaev, ``China's Central Asian Policy,'' Central Asia 
and the Caucasus, No. 3 (2007), pp. 26-39.
---------------------------------------------------------------------------
    China's relations with Central Asia slowly evolved during 
the 1990s and at first were largely limited to diplomacy and 
merchandise trade. Diplomacy included exhortations to the 
Central Asian states to crack down on support by citizens in 
their countries of separatism by Uighurs (a Turkic Muslim 
people) in Xinjiang, as well as negotiations over border 
demarcation in order to facilitate trade and reassure the 
regional states that China did not seek to annex them. During 
his early 1994 visit to Uzbekistan, Premier Li Peng highlighted 
China's interest in friendship and peaceful coexistence, 
mutually advantageous cooperation, non-interference in domestic 
affairs, and the promotion of regional stability. By the late 
1990s, however, China had become increasingly concerned that 
the ``three forces''--international terrorism, religious 
extremism, and ethnic separatism--posed a growing threat to the 
security and stability of both China and Central Asia. Also, 
domestic energy shortages contributed to China placing 
relations with the region at a higher priority level. A 
stablesecurity situation in the region was viewed as necessary 
for building energy transport links to China and for improving 
Xinjiang's economy.\134\ See Figure 18.
---------------------------------------------------------------------------
    \134\ Muratbek Imanaliev and Erlan Abdyldaev, ``Globalization 
Challenges in Central Asia and Certain Aspects of China's Central Asian 
Policies,'' Central Asia and the Caucasus, No.3 (2007), pp. 88-98; 
Niklas Swanstrom, quoted by Jeremy Bransten, ``Central Asia: China's 
Mounting Influence,'' Eurasia Insight, November 23, 2004.
---------------------------------------------------------------------------

                Figure 18. Commonwealth of Independent 
                          Central Asian States



                                     

    This report focuses on mainly non-military types of 
influence--sometimes termed ``soft power''--exercised by China 
in its relations with the Central Asian states.\135\ The term 
``soft power,'' generally has referred to influencing the 
behaviors of other countries by attracting and persuading 
others to adopt one's goals. Such influence includes 
diplomatic, cultural, and economic relations. China's military 
and security assistance also is included here. Multilateral 
forms of Chinese influence are examined, primarily that 
exercised through the Shanghai Cooperation Organization, as 
well as bilateral forms of influence.
---------------------------------------------------------------------------
    \135\ Joseph S. Nye, Jr.,``Bound to Lead: The Changing Nature of 
American Power,'' New York: Basic Books, 1990; ``Soft Power: The Means 
to Success in World Politics,'' New York: Public Affairs, 2004.
---------------------------------------------------------------------------

                  BILATERAL AND MULTILATERAL DIPLOMACY

    China has pursued both bilateral ties with each Central 
Asian state as well as multilateral ties through the Shanghai 
Cooperation Organization (SCO), whose members include China, 
Russia, and all the Central Asian countries except 
Turkmenistan, which claims to be nonaligned. China's growing 
bilateral and multilateral ties with Central Asia are the major 
impetus to political and economic integration in the region, 
according to some observers.\136\ China has concluded 
Friendship and Cooperation Treaties with Kazakhstan, 
Kyrgyzstan, Tajikistan, and Uzbekistan that provide a framework 
for enhancing bilateral relations. The most recent Friendship 
and Cooperation Treaty was signed with Tajikistan in January 
2007 and contains features common to all the treaties. Both 
sides foreswear forming alliances with or hosting troops from 
countries or groups that might threaten the security of the 
other party. Both sides agree to hold consultations if there is 
a situation that threatens the peace or security of either 
side. They pledge to create opportunities for investment and 
trade, and to work both bilaterally and within the SCO to crack 
down on terrorism, separatism, and extremism, and cross-border 
organized crime, illegal immigration, and arms and drug 
trafficking. Both sides promise to guarantee the legal rights 
of each other's visiting citizens.
---------------------------------------------------------------------------
    \136\ Adil Kaukenov, ``China's Policy Within the Shanghai 
Cooperation Organization,'' Central Asia and the Caucasus, No. 3 
(2007), pp. 62-76.
---------------------------------------------------------------------------
    Some observers suggest that China may regard close 
relations with Kazakhstan as the most important to achieving 
its strategic goals.\137\ China and Kazakhstan proclaimed a 
``strategic partnership'' in 2005, and in December 2006 
concluded a strategy for ``deepening cooperation in the 21st 
Century.'' This agreement proclaimed that both countries had 
resolved border demarcation and called for expanding trade 
turnover to $10 billion by 2010 and to $15 billion by 2015, 
building pipelines and other transport routes, and cooperating 
in oil and gas development.\138\ Despite these growing ties 
between Kazakhstan and China, many in Kazakhstan remain 
concerned about Chinese intentions and the spillover effects of 
tensions in Xinjiang. Some have raised concerns about growing 
numbers of Chinese traders and immigrants, and there are 
tensions over issues like water resources. China's crackdown on 
dissidence in Xinjiang creates concern in Kazakhstan, because 
over one million ethnic Kazakhs reside in Xinjiang and many 
Uighurs reside in Kazakhstan (some ethnic Kyrgyz also reside in 
Xinjiang). Some in Kazakhstan fear that Uighur separatism in 
Xinjiang could spread among Uighurs residing in Kazakhstan, who 
may demand an alteration of Kazakh borders to create a unified 
Uighur ``East Turkestan.''
---------------------------------------------------------------------------
    \137\ Shi Ze, ``Relations Between China and Central Asian Countries 
Face Opportunity of All-Round Development,'' China International 
Studies, Winter 2005, p. 83; Open Source Center, Central Eurasia: Daily 
Report (hereafter CEDR), September 7, 2007, Doc. No. CEP-950007.
    \138\ Open Source Center, China: Daily Report (hereafter CDR), 
December 20, 2006, Doc. No. CPP-442003.
---------------------------------------------------------------------------
    While pursuing close ties with Kazakhstan, China also has 
focused on bolstering the economic and security capabilities of 
bordering Kyrgyzstan and Tajikistan in order to prevent 
instability in these countries from affecting its own 
territory. China's interest in close relations with Uzbekistan 
derives in part from the country's large number of potential 
consumers (it is the most populous Central Asian state) as well 
as its role as a transit state to markets further west. Since 
Kazakhstan is no longer taking on new public sector foreign 
debt, Kyrgyzstan, Tajikistan, and Uzbekistan apparently were 
the targets of loans that China announced in 2004 would be made 
available for regional development (see below).
    Among multilateral ties, China cooperates in the Central 
Asia Regional Economic Cooperation program (CAREC; members are 
China, Afghanistan, Azerbaijan, Mongolia, and all the Central 
Asian states except Turkmenistan), initiated by the Asian 
Development Bank in 1997 to improve living standards and reduce 
poverty in its member states through regional economic 
collaboration. Also participating in CAREC are the European 
Bank for Reconstruction and Development (EBRD), the 
International Monetary Fund (IMF), the Islamic Development 
Bank, the United Nations Development Program (UNDP), and the 
World Bank. For the period from 2006 to 2008, CAREC plans to 
provide over $2.3 billion for more than 40 projects.

The Shanghai Cooperation Organization

    Some observers argue that China increasingly has stressed 
multilateral relations with the Central Asian region through 
the mechanism of the Shanghai Cooperation Organization (SCO), 
in which China plays the leading role.\139\ The genesis of the 
organization was an April 1996 treaty among the presidents of 
China, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan pledging 
the sanctity and substantial demilitarization of the former 
Soviet-Chinese borders. The presidents also signed protocols 
that they would not harbor or support separatists, aimed at 
China's efforts to quash separatism in Xinjiang. In April 1997, 
the five presidents met again to sign a follow-on treaty 
demilitarizing the 4,000 mile former Soviet border with China. 
In May 2001, the parties admitted Uzbekistan as a member and 
formed the SCO. The states signed a Shanghai Convention on 
joint fighting against what President Jiang Zemin termed ``the 
forces of separatism, terrorism and extremism.'' The SCO also 
agreed to set up an anti-terrorism coordinating center in the 
region. In theory, the treaty allows China to send troops into 
Central Asia at the request of one of the states. Besides 
security cooperation, China stressed the ``huge economic and 
trade potential'' of regional cooperation.\140\
---------------------------------------------------------------------------
    \139\ Shieves; Konstantin Syroezhkin, ``China in Central Asia: from 
Trade to Strategic Partnership,'' Central Asia and the Caucasus, No.3 
(2007), pp. 40-51.
    \140\ CDR, September 10, 2002, Doc. No. CPP-131.
---------------------------------------------------------------------------
    Some observers have viewed the creation of the SCO as 
reflecting the common goal of Russia and China to encourage the 
Central Asian states to combat regime opponents of the two 
major powers. While cooperating on this broad goal, Russia and 
China have appeared to disagree on other goals of the SCO and 
to vie for dominance within the organization. Russia has viewed 
the SCO mainly as a means to further military cooperation and 
to limit China's influence in Central Asia, while China in 
recent years has viewed the SCO not only as enhancing regional 
security but also as an instrument to increase trade and access 
to oil and gas.
    China stressed economic initiatives at the June 2004 SCO 
summit when President Hu Jintao offered $900 million in export 
credits with a 2% interest rate for a period of 20 years to 
Kyrgyzstan, Tajikistan, and Uzbekistan. The summit declaration 
emphasized that ``the cornerstone of stability and security of 
the Central Asian region and the adjacent countries lies in 
their economic progress, in meeting the essential needs of the 
population.'' \141\ Russia emphasized the security aspects of 
the SCO in early October 2007 when the Russia-led Collective 
Security Treaty Organization (CSTO; members include Russia, 
Armenia, Belarus, and all the Central Asian states except 
Turkmenistan) signed an information-sharing accord with the 
SCO. According to some observers, China anticipates that with 
its increasing economic and military power, it will gradually 
eclipse the influence of Russia in the region. It is possible 
that as China's influence grows in the region, Russia will 
become more alarmed and will reduce its role in the SCO (see 
also below, Implications for Central Asia).\142\
---------------------------------------------------------------------------
    \141\ CEDR, June 17, 2004, Doc. No. CEP-335.
    \142\ Konstantin Syroezhkin, ``China in Central Asia: from Trade to 
Strategic Partnership,'' Central Asia and the Caucasus, No.3 (2007), 
pp. 40-51.
---------------------------------------------------------------------------
    For the Central Asian states, the SCO is seen as balancing 
Russian and Chinese influence, since the regional states also 
belong to the economic and security organizations that are part 
of the Russia-led Commonwealth of Independent States.\143\ At 
the same time, according to some observers, regional leaders 
have preferred the economic and security cooperation offered by 
the SCO over what they view as U.S. advocacy of democratic 
``color revolutions.'' \144\ It may also be the case that 
Central Asian leaders value the SCO's economic prospects more 
than its security prospects, given the history of the group. 
The regional leaders may have devalued SCO as a security 
organization after September 11, 2001, when U.S. and Western 
military activities in Afghanistan demonstrated the lack of 
effectiveness of the SCO in combating terrorism. SCO members 
did not respond collectively to U.S. requests for assistance 
but mainly as individual states. Further challenges to the 
prestige of the SCO as a collective security organization 
occurred in 2005, when it failed to respond to the coup in 
Kyrgyzstan or to civil unrest in Uzbekistan. Russia and China 
have not used the SCO to channel significant amounts of 
military training and equipment to the regional states. In the 
case of China, relatively small amounts of security assistance 
have been provided to the Central Asian states either through 
the SCO or bilaterally, and largely has taken the form of 
training in exercises.\145\
---------------------------------------------------------------------------
    \143\ CEDR, August 22, 2007, Doc. No. CEP-25001; CDR, August 18, 
2007, Doc. No. CPP-94003; Artyom Matusov, ``Energy Cooperation in the 
SCO: Club or Gathering?'' China and Eurasia Forum Quarterly, Vol. 5, 
No. 3 (2007) pp. 83-99. Tajik journalist Qosim Bekmuhammad has argued 
that Russia's economy does not permit it to provide credits on the 
scale offered by the Chinese, so it stresses political and military 
activities in the SCO. CEDR, September 7, 2007, Doc. No. CEP-950141.
    \144\ Konstantin Syroezhkin, ``China in Central Asia: from Trade to 
Strategic Partnership,'' Central Asia and the Caucasus, No. 3 (2007), 
pp. 40-51.
    \145\ According to analyst Dru Gladney, security cooperation beyond 
pro forma exercises has mostly involved ``the occasional repatriation 
of suspected Uighur separatists.'' U.S.-China Economic & Security 
Review Commission, Hearing on China's Role in the World: Is China a 
Responsible Stakeholder? Panel IV: China's Involvement in the SCO, 
China's `Uighur Problem' and the SCO, August 3, 2006.
---------------------------------------------------------------------------
    During an early July 2005 SCO summit, the presidents of 
China, Russia, Uzbekistan, Kyrgyzstan, and Tajikistan signed a 
declaration that ``as large-scale military operations against 
terrorism have come to an end in Afghanistan, the SCO member 
states maintain that the relevant parties to the anti-terrorist 
coalition should set a deadline for the temporary use of . . . 
infrastructure facilities of the SCO member states and for 
their military presence in these countries.'' \146\ The 
declaration allegedly was strongly pushed by Russia and 
Uzbekistan. Later that month, Uzbekistan requested that the 
United States vacate an airbase near the town of Karshi 
Khanabad, which was used for U.S.-led coalition operations in 
Afghanistan, for reasons that included what Uzbekistan termed a 
stabilizing security situation in Afghanistan.
---------------------------------------------------------------------------
    \146\ CEDR, July 5, 2005, Doc. No. CPP-249.
---------------------------------------------------------------------------
    According to analyst Stephen Blank of the U.S. Army War 
College, China has fashioned ``the SCO as a template of the 
future organization of Asia against the American alliance 
system.'' He also states that China has resisted the Russian 
``idea of the SCO being a military bloc.'' Taking a different 
view, analyst Martha Olcott of the Carnegie Endowment for 
International Peace has argued that China focuses more on 
fostering regional stability than on using the SCO as an anti-
U.S. forum, and that Russia and the Central Asian states have 
resisted Chinese efforts to expand security cooperation within 
the SCO.\147\
---------------------------------------------------------------------------
    \147\ United States Commission on Security and Cooperation in 
Europe (Helsinki Commission), Testimony by Stephen Blank and Martha 
Olcott, The Shanghai Cooperation Organization: Is it Undermining U.S. 
Interests in Central Asia? September 26, 2006.
---------------------------------------------------------------------------
    While China has held several military exercises with the 
Central Asian states that it claims are under the aegis of the 
SCO, some have appeared to be primarily bilateral exercises 
held between China and one other Central Asian state. China has 
also provided counter-terrorism training and border security 
assistance to Central Asian countries under the aegis of the 
SCO, including funding for radiation detection equipment at 
border crossings.\148\
---------------------------------------------------------------------------
    \148\ CDR, September 22, 2006, Doc. No. CPP-63007; CDR, September 
23, 2006, Doc. No. CPP-706021; NDU


   China and Kyrgyzstan held a joint military exercise in 
        October 2002 that China hailed as the first under SCO 
        auspices and the first by the Chinese People's 
        Liberation Army on foreign soil.\149\
---------------------------------------------------------------------------
    \149\ CDR, December 15, 2003, Doc. No. CPP-91.

   In August 2003, China's ground forces participated with the 
        forces of Russia, Kazakhstan, Kyrgyzstan, and 
        Tajikistan in Xinjiang in what China termed the first 
        SCO multilateral military exercise (another part of the 
        exercise was held in Kazakhstan without the 
---------------------------------------------------------------------------
        participation of Chinese troops).

   In 2005, Russia and China held a joint military exercise in 
        northeastern China. The two sides claimed that the 
        exercises were aimed to combat terrorism or political 
        disorder in an SCO member-state, but some observers 
        suggested that the exercises had more in common with 
        ``a conventional all-out assault.'' \150\
---------------------------------------------------------------------------
    \150\ Roger McDermott, The Rising Dragon: SCO Peace Mission 2007, 
Occasional Paper, The Jamestown Foundation, October 2007.

   In August 2006, Chinese and Kazakh police and security 
        forces held their first coordinated anti-terrorist 
---------------------------------------------------------------------------
        exercises on their own respective territories.

   In September 2006, Chinese and Tajik military forces held a 
        joint exercise at a Russian military base in 
        Tajikistan.

   In August 2007, an SCO military exercise took place in 
        Xinjiang and southern Russia, the first that included 
        representatives of all member countries (although 
        Russian and Chinese forces predominated). The scenario 
        for the exercise involved defeating terrorists whom had 
        taken over a town in an SCO member-state.


    The most recent SCO summit of the heads of state took place 
in Bishkek, Kyrgyzstan, in mid-August 2007. A Bishkek 
Declaration and a multilateral Friendship and Cooperation 
Treaty were signed. The Bishkek Declaration appeared to refer 
to the United States when it criticized ``unilateral actions'' 
by some countries and when it stated that ``Central Asia's 
security and stability first relies on the efforts of various 
countries in this region.'' It called for the members to 
coordinate their energy security strategies. The Friendship 
Treaty largely reiterated provisions of the bilateral 
friendship treaties China has signed with regional states.

                             ECONOMIC TIES

Trade and Foreign Investment

    Trade turnover between China and Central Asia has increased 
from negligible amounts during the Soviet period to almost $12 
billion in 2006, according to Chinese Customs Statistics (See 
Table 7). Chinese officials have stated that trade with all the 
regional states expanded in 2007. While China is becoming a 
major trade partner for the Central Asian states, the region 
still accounts for only a tiny percentage (about 1.3%) of 
China's overall foreign trade.\151\ Most of China's regional 
trade is with Kazakhstan, and Kazakhstan ranks along with 
Russia as China's largest trade partners among the Soviet 
successor states. Kyrgyzstan ranks second after Kazakhstan in 
regional trade turnover with China, and this bilateral trade 
may substantially increase in coming years after the Kyrgyz-
China border post at Irkeshtam is linked by an improved highway 
(and possible railway) to Kyrgyzstan's southern city of Osh (at 
the edge of the Fergana Valley shared by Kyrgyzstan, 
Tajikistan, and Uzbekistan), and possibly to Uzbekistan's city 
of Andijon (see also below).
---------------------------------------------------------------------------
    \151\ Niklas Swanstrom, Nicklas Norling, and Zhang Li, ``China,'' 
in The New Silk Roads: Transport and Trade in Greater Central Asia, 
edited by S. Frederick Starr (Washington D.C.: Central Asia-Caucasus 
Institute & Silk Road Studies Program, 2007).
---------------------------------------------------------------------------
    For the Central Asian states, trade with China has become 
more significant in recent years. In 2006, Kazakhstan's main 
export markets were Germany, Russia, and China, and its main 
import markets were Russia and China. China is Kyrgyzstan's 
largest trade partner. According to French analyst Sabastien 
Peyrouse, up to 75% of China's exports to Kyrgyzstan are re-
exported to other Central Asian countries, and the profits made 
by this re-exporting may constitute a notable part of 
Kyrgyzstan's economy.\152\
---------------------------------------------------------------------------
    \152\ Sabastien Peyrouse, ``The Economic Aspects of the Chinese-
Central Asia Rapprochement,'' p. 17. Although it is difficult to 
estimate the amount of profits, a 10% return would yield some $160 
million to the Kyrgyz economy. To compare to other sources of GDP, 
labor remittances are estimated at between $200-$350 million annually. 
According to the International Monetary Fund (IMF), Kyrgyzstan's 
nominal GDP was $2.6 billion in 2006. IMF, Kyrgyz Republic: Enhanced 
Initiative for Heavily Indebted Poor Countries: Preliminary Document, 
IMF Country Report No. 06/4 17, November 2006; The World Bank, 
Migration and Remittances: Eastern Europe and the Former Soviet Union, 
2006.

                               Table 7: China's Trade with Central Asia, 2004-2006
                                                (million dollars)
----------------------------------------------------------------------------------------------------------------
                                                                    Percent     Percent     Percent
                                                                   Share of    Share of    Share of     Percent
           Country               2004        2005        2006       China's     China's     China's     Change
                                                                  Exports in  Exports in  Exports in   2006 over
                                                                     2004        2005        2006        2005
----------------------------------------------------------------------------------------------------------------
China's Exports to Central
 Asia
Kazakhstan..................    2,212.49    3,898.88    4,751.53        0.37        0.51        0.49       21.87
Kyrgyzstan..................      492.76      865.92    2,113.03        0.08        0.11        0.22      144.02
Tajikistan..................       53.49      143.87      305.70        0.01        0.02        0.03      112.49
Turkmenistan................       84.80       90.44      162.45        0.01        0.01        0.02       79.62
Uzbekistan..................      172.47      230.22      406.10        0.03        0.03        0.04       76.40
----------------------------------------------------------------------------------------------------------------
  Total.....................    3,016.04    5,229.33    7,738.81        0.50        0.68        0.80       47.99
================================================================================================================
China's Imports from Central
 Asia
Kazakhstan..................    2,280.81    2,902.27    3,607.17        0.41        0.44        0.46       24.29
Kyrgyzstan..................      109.45      104.56      112.79        0.02        0.02        0.01        7.87
Tajikistan..................       15.37       14.20       18.00        0.00        0.00        0.00       26.81
Turkmenistan................       13.88       18.99       16.01        0.00        0.00        0.00     (15.68)
Uzbekistan..................      402.70      451.02      565.85        0.07        0.07        0.07       25.46
----------------------------------------------------------------------------------------------------------------
  Total.....................    2,822.21    3,491.04    4,319.82        0.50        0.53        0.54       23.74
================================================================================================================
China's Total Trade Turnover
 with Central Asia
  Total Turnover............    5,838.25    8,720.37   12,058.63        1.00        1.21        1.34       38.28
----------------------------------------------------------------------------------------------------------------
Source: World Trade Atlas.

    Roads and railways have been the focus of investments to 
provide the infrastructure for increased commercial ties 
between China and Central Asia. In 1997, China also decided to 
place greater strategic significance on obtaining access to 
world energy resources, including the purchase of oilfields and 
the building of pipelines in Central Asia. China has reported 
that it has funded 127 projects since launching its $900 
million SCO funding initiative in 2004. Although offered under 
the SCO framework, each country has to negotiate separately 
with China about specific projects.\153\ Under the western 
development strategy of China's 11th Five-Year Plan (2006-
2010), the government aimed to open Xinjiang to foreign 
investment and to encourage Chinese firms to carry out economic 
and technological cooperation with Central Asian nations. 
French analyst Sabastien Peyrouse argues that China carries out 
investment projects in Central Asia that Western investors 
might consider too risky, in part because China is looking 
long-term and is interested in fostering stability in the 
region, and perhaps also because some potentially highly 
profitable areas of investment already are taken by Russian and 
Western firms.\154\
---------------------------------------------------------------------------
    \153\ Artyom Matusov, China and Eurasia Forum Quarterly, Vol. 5, 
No. 3 (2007).
    \154\ Vice Minister of Commerce Yi Xiaozhun on Oct 17, 2006. CDR, 
October 19, 2006, Doc. No. CPP-715032; Adil Kaukenov, ``China's Policy 
Within the Shanghai Cooperation Organization,'' Central Asia and the 
Caucasus, No. 3 (2007), pp. 62-76.

    Kazakhstan-China Trade and Investment Ties.--Since the 
early 1990s, Kazakhstan has been the top trade partner of China 
in the Central Asian region. China also is among the five 
largest foreign investors in the country, reportedly 
contributing $8 billion of investment by mid-2007. President 
Nazarbayev reported in August 2007 that ``the key topic'' of 
his talks with visiting Chinese President Hu Jintao ``was, of 
course, trade, economic, and investment cooperation . . . We 
discussed . . . energy, oil and gas industry, petrochemicals, 
oil processing, tourism, transport, and communications in 
detail.'' He raised the hope that trade turnover would amount 
to $1 billion per month in 2008, and even suggested that it 
would be ``great to reach the level of U.S.-Canadian trade 
turnover, $1 billion every day. I am convinced that we will do 
this.''\155\
---------------------------------------------------------------------------
    \155\ Interfax, August 18, 2007.
---------------------------------------------------------------------------
    A railway line from Kazakhstan's city of Almaty to the 
border post of Dostyk-Alataw and hence to Urumqi in Xinjiang 
currently is the only rail link between China and Central Asia 
and carries a large share of the regional trade. This railway 
is linked to northern China's seaport at Tianjin. Reportedly, 
an increasing amount of trade between Kazakhstan and Japan, 
South Korea and the United States travels via the port and 
railway to Kazakhstan. A highway and the newly built Atasu-
Alashankou oil pipeline (see below) add to the significance of 
the Dostyk-Alataw border post and both China and Kazakhstan 
have invested in infrastructure to facilitate trade. Kazakhstan 
opened a major highway route in 2004 that links Almaty to China 
at the border town of Khorgos.\156\ China hopes to link Khorgas 
to its railway network in 2008, and Kazakhstan and China are 
planning for a rail line from Khorgas to the Kazakh town of 
Sary Ozek (north of Almaty), which could become the second 
cross-border rail link between the two countries.
---------------------------------------------------------------------------
    \156\ CDR, September 22, 2007, Doc. No. CPP-968049.

    Kyrgyzstan-China Trade and Investment Ties.--In January 
2002, the visiting Chairman of China's International Committee 
for Natural Disasters, Ismail Amat, met with Kyrgyz First 
Deputy Prime Minister Nikolay Tanayev to discuss a possible 
Chinese loan to build a railway line from Kashgar (Kashi) in 
Xinjiang through Jalalabad in Kyrgyzstan to Andijon in 
Uzbekistan, and the possible supply of Kyrgyz electricity to 
China to pay for the loan. The two sides also discussed 
progress on a joint Kyrgyz-Chinese paper mill being built in 
Kyrgyzstan, for which China extended an $18 million loan for 
refurbishment.\157\ In June 2002, after the Kyrgyz legislature 
had ratified a border demarcation agreement, Kyrgyzstan's then-
President Askar Akayev visited China and met with Chairman 
Jiang Zemin to sign a friendship and cooperation treaty.\158\ 
China indicated that it also would provide a loan to 
Kyrgyzstan, and visiting Chinese Deputy Minister of Foreign 
Trade Zhang Xiang signed an agreement with newly appointed 
Prime Minister Tanayev in August 2002 for a $1.875 million loan 
to complete a feasibility study for building the Kashgar-
Andijon rail line and for purchasing broadcasting, 
agricultural, and security-related equipment. The two sides 
also celebrated the opening of the paper mill.\159\ In 2005, 
China allocated $3.75 million to repair the 16 miles of roadway 
between the Kyrgyz capital of Bishkek and the Manas 
airport.\160\ In September 2006, China provided a loan for 
Kyrgyzstan's purchase of automobiles worth $1.8 million.\161\
---------------------------------------------------------------------------
    \157\ CEDR, January 16, 2002, Doc. No. CEP-335.
    \158\ Moscow Kommersant, as reported in CEDR, June 25, 2002, Doc. 
No. CEP-214.
    \159\ CEDR, August 27, 2002, Doc. No. CEP-291; September 3, 2002, 
Doc. No. CEP-199; September 21, 2002, Doc. No. CEP-65; October 26, 
2002, Doc. No. CEP-126.
    \160\ CEDR, February 21, 2005, Doc. No. CEP-129.
    \161\ CEDR, May 13, 2005, Doc. No. CEP-402005.
---------------------------------------------------------------------------
    Popular contention in Kyrgyzstan over the cession of some 
mountainous border territory to China raised concerns among 
Chinese officials. In June 2006, Kyrgyz President Kurmanbek 
Bakiyev visited China and assuaged these concerns somewhat by 
signing a joint declaration with Chairman Hu Jintao re-
affirming that ``the parties will abide strictly by all the 
agreements and documents signed between the two countries on 
the border issue.'' The two sides signed a contract on the 
construction of a cement plant in the town of Kyzyl-Kiya in Osh 
Region, for which China provided a $70 million loan, and both 
sides pledged to cooperate in the successful operation of the 
plant. They raised regrets that their earlier joint investment 
in a paper mill (mentioned above) had failed.\162\ China also 
agreed to provide $8.75 million to Kyrgyzstan to purchase 1,200 
tractors on an urgent basis.\163\
---------------------------------------------------------------------------
    \162\ According to one report, the paper mill had failed to pay its 
electricity bill and power was shut off in May 2004. Management-
employee conflicts were also alleged. Kyrgyzstan, which owned a 75% 
share in the mill (China owned 25%), preemptorily decided to sell its 
shares. Kyrgyzstan Daily Digest, Eurasianet, May 20, 2004. In August 
2007, China stated that it would write off its loan to refurbish the 
mill.
    \163\ CEDR, July 2, 2006, Doc. No. CEP-950067; October 26, 2006, 
Doc. No. CEP-950306. In September 2007, the mayor of Osh (the regional 
capital) stated that China was the largest foreign investor in the 
city. CEDR, September 19, 2007, Doc. No. CEP-950242.

    Tajikistan-China Trade and Investment Ties.--Although China 
previously had provided some small loans to Tajikistan, 
bilateral ties greatly improved after the two countries signed 
a border demarcation agreement in May 2002. In 2005, China 
announced loans of $110 million (for 20 years at 2% interest 
with a five-year grace period) to finance Chinese construction 
of two highway tunnels, one connecting Dushanbe to the southern 
city of Kulyab and the other connecting Dushanbe to the 
northern city of Khuj and. Many observers view the construction 
of these tunnels as potentially enhancing the Tajik 
government's control over the country. Construction on the 
Dushanbe-Kulyab tunnel project reportedly began in October 2006 
and is projected to be completed in 2009. Other projects funded 
with Chinese loans include the rehabilitation of the highway 
from Dushanbe through Khuj and to Chanak (near the Uzbek 
border), modernization of the telecommunications system, and 
upgrading of electricity transmission lines.\164\ At the July 
2006 ceremony to begin repaving the Dushanbe-Chanak highway, 
President Rahmon claimed that the Chinese firm doing the work 
would employ 2,500 local citizens, and that the road would be 
completed in 2008.\165\
---------------------------------------------------------------------------
    \164\ CEDR, March 12, 2006, Doc. No. CEP-950006; June 15, 2006, 
Doc. No. CEP-950119; Agence Presse France, June 24, 2006. Chinese 
investments in Tajikistan's hydroelectric and transport infrastructure 
amounted to $500 million, Rakhmon claimed. CEDR, September 14, 2007, 
Doc. No. CEP-950368.
    \165\ CEDR, July 11, 2006, Doc. No. CEP-950325.
---------------------------------------------------------------------------
    In January 2007, Chinese and Tajik firms signed an 
agreement in Beijing for the provision of a $200 million loan 
(for 25 years with an annual interest of 1%) to build a 150-
megawatt hydroelectric power station on the River Zarafshon in 
northern Tajikistan. That same month, the visiting deputy head 
of China's Eximbank, Li Jun, praised Tajikistan as a leading 
country among SCO members in taking advantage of preferential 
loans to carry out projects. He also announced new loans to 
provide 23 Chinese locomotives to the Tajik railway 
directorate, and to finance work on a railway from Dushanbe to 
the southern city of Qurghonteppa, a railway from the southern 
city of Kolkhozobod to the town of Panji Poyon (on the Afghan 
border), and a railway from the northern town of Konibodom to 
the Uzbek town of Bekobad. The June 2007 purchase by the 
Chinese Zijin Mining Group of the controlling shares of a 
British company involved in gold mining in Tajikistan appears 
to be another example of China's interest in regional mineral 
resources.\166\
---------------------------------------------------------------------------
    \166\ CEDR, January 20, 2007, Doc. No. CEP-950072.
---------------------------------------------------------------------------
    Tajik President Rahmon generally has viewed close economic 
ties with China as enhancing Tajikistan's development. During 
his January 2007 China visit, he stated that about 40 Chinese 
companies were investing and operating in Tajikistan, and at 
the August 2007 SCO Summit, he reported that he had urged China 
to increase investment and that it had agreed to explore joint 
ventures for cotton processing. In September 2007, he termed 
the expansion of the Tajik-Chinese ``partnership'' a priority 
of Tajikistan's foreign policy. Tajikistan's state-run news 
agency reported in January 2008 that Tajikistan owed China $217 
million, the largest amount owed to one country. One Tajik 
newspaper seemed to reflect this positive view of China's 
regional political and economic influence when it stated that 
``China is a reliable ally of Central Asian states, which can 
support their struggle against various groups that are 
considered as a threat . . . [China is] powerful and has large 
financial resources for investing in their economies.'' \167\
---------------------------------------------------------------------------
    \167\ CEDR, April 11, 2007, Doc. No. CEP-950068; September 14, 
2007, Doc. No. CEP-950247.

    Turkmenistan-China Trade and Investment Ties.--China's 
trade ties with Turkmenistan were minimal during much of the 
autarchic rule of the late Turkmen President Saparamurad 
Niyazov, but began to increase after Niyazov visited China in 
April 2006. After Niyazov's death in late 2006, Russia, the 
United States, China, and the EU moved to improve relations 
with Turkmenistan. Although Russia has been the main customer 
for Turkmen natural gas exports, the United States and the EU 
have been interested in building possible trans-Caspian oil and 
gas pipelines from Turkmenistan that would link to pipelines in 
Azerbaijan. At the same time, China has been interested in 
building pipelines from Turkmenistan to China (see below).
    Several inter-governmental accords were signed during the 
late President Niyazov's April 2006 visit to China that 
contributed to increased Chinese trade and investment. In late 
2006, China extended a $24.5 million low-interest loan to 
finance construction or revamping of fiber optic and cellular 
telephone networks throughout the country.\168\ In March 2007, 
China provided a $24 million loan for the purchase of Chinese 
drilling equipment and field camps for geological work and a 
$36 million loan to purchase Chinese railway passenger cars.
---------------------------------------------------------------------------
    \168\ CEDR, September 27, 2006, Doc. No. CEP-950353.

    Uzbekistan-China Trade and Investment Ties.--Bilateral 
trade between China and Uzbekistan was limited for many years 
by Uzbekistan's import substitution strategy of development and 
its hopes for greater economic ties with the West. By the early 
2000s, however, it appeared that Uzbekistan and China had begun 
to explore boosting trade relations. In January 2003, China's 
Eximbank proposed extending a $2 million loan for 15 years at 
3% interest to Uzbekistan for small-scale energy projects. In 
June 2004, Chinese President Hu Jintao visited Tashkent to take 
part in the SCO summit, and announced grants and long-term 
loans amounting to $350 million for economic development in 
Uzbekistan (among the $900 million he offered to the SCO 
members). A Russian newspaper reported that ``members of the 
Chinese delegation said that this is the biggest economic aid 
package ever granted by China to any country at one time.'' The 
state-owned China National Petroleum Corporation (CNPC) also 
signed oil and gas cooperation contracts with Uzbekneftegaz. 
Perhaps also indicating Uzbekistan's ability to play off 
prospective aid donors, Russia's Lukoil oil firm and Gazprom 
gas pipeline firm signed large-scale investment accords with 
Uzbekistan.\169\
---------------------------------------------------------------------------
    \169\ CEDR, July 1, 2004, Doc. No. CEP-93. Uzbek media reported in 
early 2007 that Uzbekistan apparently had not used much of the extended 
credit, which was intended for the import of Chinese-made goods, and 
that China's Eximbank had extended the time limit on applying for the 
credit. CEDR, March 16, 2007, Doc. No. CEP-950385.
---------------------------------------------------------------------------
    According to many observers, China's stress on regional 
stability as well as on good bilateral relations contributed to 
its strong support for Karimov's crackdown on dissent in 
Andijon in May 2005.\170\ In July 2005, China allocated two 
grants worth $3.6 million for economic training and other 
cooperation. In September 2005, a production-sharing agreement 
was concluded by the CNPC, Uzbekistan's Uzbekneftegaz, Russia's 
Lukoil, Malaysia's Petronas, and South Korea's National Oil 
Corporation to explore and develop prospective natural gas 
deposits in the Aral Sea (see below). In June 2006, CNPC signed 
contracts with Uzbekneftegaz for seismic exploration of 
potential oil and gas fields and for drilling 27 wells within 
five years. In August 2006, the trade ministers of the SCO 
member states approved what was termed the SCO's first highway 
construction project, the Andijon to Kashgar highway, ``which 
will . . . greatly facilitate the revival of the Great Silk 
Road.'' \171\
---------------------------------------------------------------------------
    \170\ Kevin Sheives, ``China Turns West: Beijing's Contemporary 
Strategy Towards Central Asia,'' Pacific Affairs, June 22, 2006.
    \171\ CEDR, July 18, 2005, Doc. No. CEP-27077; August 24, 2006, 
Doc. No. CEP-950145; September 30, 2007, Doc. No. CEP-950009; CDR, 
September 3, 2006, Doc. No. CPP-52003.
---------------------------------------------------------------------------

Energy

    According to analyst Niklas Swanstrom, ``the most important 
reason for a Chinese presence,'' in Central Asia ``appears to 
be . . . to secure China's growing need for oil and natural 
gas.'' \172\ Although Central Asia's oil and gas are not 
expected to amount to more than a tiny fraction of China's 
energy imports, they are considered significant by China's 
leaders for the development of Xinjiang, China's northwestern 
province. Increased access to gas might also facilitate greater 
use of gas in China over more polluting energy sources. 
According to analyst Sebastien Peyrouse, China may also regard 
electricity imports from Central Asia as significant in 
addressing energy needs in Xinjiang. China also hopes to earn 
funds by participating in joint ventures and otherwise 
investing in dams and power lines, and by serving as a transit 
state for Central Asian electricity exports to Pakistan.\173\
---------------------------------------------------------------------------
    \172\ Niklas Swanstrom, ``China and Central Asia: A New Great Game 
or Traditional Vassal Relations?'' Journal of Contemporary China, Vol. 
14, No. 45 (2005), p. 570.
    \173\ ``The Hydroelectric Sector in Central Asia and the Growing 
Role of China,'' China and Eurasia Forum Quarterly, Vol. 5, No. 2 
(2007), pp. 131-148.

    Kazakhstan-China Energy Ties.--In 1997, Kazakhstan and 
China agreed on building an oil pipeline to Xinjiang within 
five years and Kazakhstan granted the CNPC production rights to 
develop some oil fields in the Aktobe Region in northwestern 
Kazakhstan. China's efforts to form an international financing 
consortium for the pipeline were unsuccessful, and China 
decided to largely finance the project itself. In 2005, CNPC 
purchased the Canadian-based company PetroKazakhstan for a 
reported $4.2 billion, giving it control over the Shymkent oil 
refinery, production licenses for twelve oilfields, and 
exploration licenses for five other areas. Responding to the 
sale, the Kazakh legislature quickly passed a law giving the 
government the right to preempt such transfers. In order to 
complete the sale, CNPC reportedly had to transfer about one-
third of the PetroKazakhstan shares to KazMunaygaz, and yield 
effective control over the Shymkent refinery, which Kazakhstan 
wanted to control to ensure domestic supplies.
    Kazakhstan and China completed construction in mid-2006 of 
a 600 mile oil pipeline from Atasu in central Kazakhstan to the 
Xinjiang region of China. Initial capacity is 146.6 million 
barrels per year. The $700 million pipeline was mostly funded 
by China. At Atasu, the pipeline links to another pipeline from 
Kumkol, also in central Kazakhstan, and will eventually link to 
Atyrau on Kazakhstan's Caspian Sea coast. Chinese customs 
officials reported in mid-2007 that about 29.3 million barrels 
of oil had been imported through the pipeline in its first year 
of operation (other oil continued to be imported by rail). To 
process the oil, China is building the country's largest oil 
refinery in Xinjiang, which is slated for completion in 2008. 
Some observers have argued that the pipeline has been greatly 
underutilized in its first year of operation, including because 
Russia has balked at supplying oil to China through the 
pipeline.\174\
---------------------------------------------------------------------------
    \174\ Nadia Rodova, ``Russian exports to China via Kazakhstan to 
start this year,'' Platts Commodity News, June 1, 2007. Artyom Matusov, 
China and Eurasia Forum Quarterly, Vol. 5, No. 3 (2007).
---------------------------------------------------------------------------
    Perhaps as part of an effort to gain greater access to 
Kazakh oil to help fill the pipeline--particularly the large 
reserves of oil in western Kazakhstan--China's state-owned 
CITIC Group investment firm acquired the Kazakh oil assets of 
Canada's Nations Energy Company for $1.91 billion at the end of 
2006, giving China the rights to develop the Karajanbas oil and 
gas field, near Aqtau on the Caspian Sea, until 2020. The 
pending sale reportedly raised concerns in the Kazakh 
legislature and in the Energy Ministry that China was obtaining 
too many national energy assets.\175\ These concerns may have 
led to a concession by CITIC to give KazMunaiGaz a 50% stake in 
the operating company that will develop the oilfield. To move 
the oil and gas to China, visiting President Hu Jintao and 
President Nazarbayev agreed in August 2007 to build pipelines 
so that ``the Caspian will be linked to western China,'' 
according to President Nazarbayev. He announced that Kazakhstan 
and China would jointly finance the construction of an oil 
pipeline from central Kazakhstan to the Caspian Sea and a 4,350 
mile gas pipeline to be completed by 2009 with an annual 
capacity of 40 billion cubic meters to deliver gas from 
Kazakhstan and Turkmenistan to China. The gas pipeline will 
start in Xinjiang and will split into two branches near 
Shymkent in southern Kazakhstan. One branch will go through 
Uzbekistan to Turkmenistan, and the other will go to gas fields 
in southwestern Kazakhstan.\176\
---------------------------------------------------------------------------
    \175\ According to some reports, the 50,000 bpd of current heavy 
crude production at the Karajanbas field, when added to 150,000 bpd at 
the Kumkol fields and 116,000 bpd in western Kazakhstan, would result 
in Chinese control over about one-fourth of Kazakhstan's production of 
1.3 million bpd. ``CITIC to buy Nations Energy,'' Open Source Center 
Feature, October 27, 2006, Doc. No. FEA-29192; November 17, 2006, Doc. 
No. FEA-030017; CEDR, November 18, 2006, Doc. No. CEP-950145. CNPC 
reportedly has invested $8.5 billion in Kazakhstan through 2006. 
IntelliNews, August 24, 2007.
    \176\ CEDR, August 18, 2007, Doc. No. CEP-950135; September 7, 
2007, Doc. No. CEP-950287. Some Russian observers viewed the Summer 
2007 Chinese oil and gas agreements with Kazakhstan and Turkmenistan as 
representing the ``breakaway'' of the two states from Russian 
influence. CEDR, August 1, 2007, Doc. No. CEP-380002. China also has 
taken part in the building of the Moyinake hydropower station in 
Almaty, a project of China and Kazakhstan. When the plant opens, it 
will transport part of the electricity to Xinjiang.

    Turkmenistan-China Energy Ties.--Although Turkmen-Chinese 
energy relations were minor compared to Turkmen-Russian ties, 
China reportedly provided a $12 million loan in the late 1990s 
to Turkmenistan's state-owned Turkmennebit oil firm and 
Turkmengaz gas firm to purchase Chinese drilling and hoist 
equipment and spare parts. In 2003, China provided a $1.875 
million grant and a $3.6 million loan (for 20 years with no 
interest) to develop Turkmenistan's gas industry.\177\ 
Indicative of stepped-up relations, Niyazov visited China in 
April 2006 and the two countries signed general accords to 
construct a gas pipeline for the export of 30 billion cubic 
meters of Turkmen gas to China. China also pledged new 
preferential loans. CNPC signed a $150 million service contract 
with Turkmenistan in May 2007 for drilling and exploration work 
at the Gunorta Eloten oil and gas field. According to some 
estimates, the Gunorta Eloten oil and gas field may contain 
reserves of 7 trillion cubic meters of natural gas. In July 
2007, visiting Turkmen President Berdymuhammedow and President 
Hu Jintao witnessed the signing of a gas sales and purchase 
agreement between CNPC and the Turkmen State Agency for the 
Management And Use Of Hydrocarbon for the supply of 30 billion 
cubic meters of gas per year for the period 2009-2038. The two 
sides also signed a production sharing agreement to develop the 
Bagtyyarlyk area in eastern Turkmenistan, near the Uzbek 
border.
---------------------------------------------------------------------------
    \177\ CEDR, December 28, 2003, Doc. No. CEP-62; December 25, 2003, 
Doc. No. CEP-67.
---------------------------------------------------------------------------
    China and Uzbekistan signed an inter-governmental agreement 
in May 2007 on the construction of the 330-mile Uzbek section 
of the Turkmenistan-China gas pipeline. A working group was set 
up to complete a feasibility study by the end of the year. In 
August 2007, China's Eximbank agreed to lend Uzbekistan $177.9 
million for oil and gas projects.\178\ In late 2007, CNBC and 
the state-owned Uzbekneftegas oil and gas firm began exploring 
five areas of Uzbekistan.
---------------------------------------------------------------------------
    \178\ CEDR, August 22, 2007, Doc. No. CEP-950253.
---------------------------------------------------------------------------

                           FOREIGN ASSISTANCE

    There are no official Chinese data on grant assistance to 
Central Asia. Most assistance to Central Asia has been in the 
form of concessionary loans, in most cases to governments and 
joint ventures to finance the purchase of Chinese equipment and 
services. Most observers have suggested that Chinese grant 
assistance to Central Asia has been greatly eclipsed by that 
given by the United States and other donors. In some 
categories, however, Chinese assistance may be notable, 
particularly educational exchanges.
    Educational and cultural exchanges have been stepped up, 
both bilaterally and under the aegis of the SCO. Confucius 
Institutes have been set up and funded in Kazakhstan, 
Kyrgyzstan, and Uzbekistan, among the scores established 
worldwide since 2004 to foster Chinese language and culture. 
Russia and China seemed to compete at the August 2007 SCO 
summit in offering educational exchanges, with China offering 
to boost the number of exchanges and President Putin perhaps 
countering by calling for setting up an SCO University. In 
September 2007, Turkmen President Berdimuhamedow praised China 
for greatly boosting the number of Turkmen students admitted to 
study at leading Chinese universities.\179\
---------------------------------------------------------------------------
    \179\ CEDR, September 14, 2007, Doc. No. CEP-950354.
---------------------------------------------------------------------------
    Among reports of Chinese grant assistance to Central Asia, 
several appear to involve security assistance. According to one 
U.S. analyst, these grants are indicative of China's increased 
military diplomacy activities in developing countries worldwide 
since the early 2000s. Examples in Central Asia include 
uniforms for the Tajik armed forces, 20 jeeps for Kyrgyzstan's 
Ministry of Public Security, and 40 all-terrain vehicles for 
the Kazakhstan military.\180\ According to a report by Agence 
Presse France, ``Since 1993 China has given more than $30 
million to [Tajikistan] in technical aid for the Tajik police 
and army.'' Turkmen media reported in July 2006 that China had 
provided a $2.5 million grant to the Turkmen State Customs 
Service for the delivery of a mobile customs inspection system. 
Kyrgyz Television reported in September 2006 that the Kyrgyz 
National Guard received a technical assistance grant in the 
form of cars and barracks worth about $245,000 from the Chinese 
People's Armed Police Force. In March 2007, the Chinese 
Ministry of State Security provided computers, printers, 
laptops, video cameras, riot gear, night vision devices, and 
other equipment worth $321,000 to Kyrgyzstan's Interior 
Ministry. In May 2007, China provided crime detection equipment 
and training ``as a gift'' to the Uzbek Ministry of Internal 
Affairs.\181\
---------------------------------------------------------------------------
    \180\ Phillip C. Saunders, China's Global Activism: Strategy, 
Drivers, and Tools, National Defense University Press, Washington, 
D.C., October 2006.
    \181\ CDR, June 24, 2006, Doc. No. CPP-52012; CEDR, July 16, 2006, 
Doc. No. CEP-950034; September 2, 2006, Doc. No. CEP-950039; May 26, 
2007, Doc. No. CEP-950137.
---------------------------------------------------------------------------

                     IMPLICATIONS FOR CENTRAL ASIA

    Many analysts have viewed the growing Chinese diplomatic, 
economic, and security influence in the Central Asian states as 
enhancing their development and stability. They argue that 
Chinese interests are not hegemonic but are limited to mainly 
market- and security-related goals.\182\ These analysts also 
tend to view China's growing presence in the region as not 
greatly restricting the interests of Russia or the United 
States, since the developmental needs of the region are vast. 
The growth of regional trade and transport with China provides 
the states more freedom of choice in their trade relations with 
Russia and other countries.\183\
---------------------------------------------------------------------------
    \182\ According to analyst Martha Olcott, China's main interest is 
energy ties with the region, and the SCO as a vehicle for building such 
ties does not today pose ``any direct threat to U.S. interests in 
Central Asia or in the region more generally.'' United States 
Commission on Security and Cooperation in Europe (Helsinki Commission), 
Testimony by Martha Olcott, The Shanghai Cooperation Organization: Is 
it Undermining U.S. Interests in Central Asia? September 26, 2006.
    \183\ Trade leverage was stressed in one Hong Kong publication 
which argued that Turkmenistan's 2006-2007 agreements on supplying gas 
to China are ``an opportunity'' for the country ``to free itself from 
Russia's stranglehold over its gas export markets.'' Asia Sentinel, 
September 7, 2007.
---------------------------------------------------------------------------
    Other observers view the growing Chinese presence as 
ultimately harmful to the independence and development of the 
Central Asian states (see below). They also view China's 
growing influence as coming at the expense of Russian and U.S. 
influence. Given Russia's traditional hegemonic role in the 
region, these analysts stress that Russian and Chinese policy 
will inevitably clash. Many of these observers view Russia as 
ultimately losing some or most influence in the region.\184\
---------------------------------------------------------------------------
    \184\ According to Kazakh analyst Venera Gallamova, ``neither the 
course of the geopolitical contest, nor the probable deviations from 
the policy of certain Central Asian republics . . . will be able to 
break the general trend toward China becoming the main regional 
nation.'' ``Central Asia and China: New Horizons of International 
Regionalization,'' Central Asia and the Caucasus, No. 3 (2007), p. 86. 
Similarly, Russian analyst Aleksandr Khramchikhin has argued that 
Kyrgyzstan and Tajikistan, the most economically fragile states in the 
region, ``can only await their fate. It will be decided by Moscow and 
Beijing, with some input from Astana. Most likely, the strongest and 
most pragmatic country's concept will prevail. That is the Chinese 
side.'' CEDR, August 22, 2007, Doc. No. Doc. No. CEP-25001.
---------------------------------------------------------------------------

Human Rights

    Most analysts maintain that China's poor human rights 
record serves as a poor model for the Central Asian states. 
According to the U.S. State Department, China continues to 
commit human rights abuses against the Uighurs and encourages 
the Central Asian states to limit the rights of the 
Uighurs.\185\ China and the regional states, with the possible 
exception of Kyrgyzstan, fear that democratization will be 
destabilizing, and they may exaggerate Islamic extremism in 
order to crack down on democratization demands. China raised 
concerns in 2005 that Kyrgyzstan's ``tulip revolution'' that 
deposed long-time president Askar Akayev would be 
destabilizing, and a major goal of Kyrgyz President Bakiyev's 
June 2006 visit to China was to assure his hosts that his 
government would maintain domestic order. At the end of a visit 
by China's Premier Wen Jiabao to Uzbekistan in November 2007, a 
communique issued by the two sides affirmed that ``the Chinese 
side opposes any intervention in Uzbekistan's internal affairs 
in the name of `human rights.' '' \186\
---------------------------------------------------------------------------
    \185\ U.S. Department of State, Country Reports on Human Rights 
Practices for 2006. Washington, D.C.: Government Printing Office, Mar. 
6, 2007.
    \186\ CDR, November 3, 2007, Doc. No CPP-73005.
---------------------------------------------------------------------------
    Reflecting the view that China is a poor human rights 
example for Central Asia, Sen. Sam Brownback warned at a 
hearing in September 2006 that ``a further rise in SCO 
influence can only encourage the governments of Central Asia in 
more repressive and less reformist policies that will 
contribute to the growth of regional extremism and the 
terrorism that the SCO was founded to combat.'' \187\ In his 
testimony at the hearing, analyst Sean Roberts of Georgetown 
University suggested that one reason why the Central Asian 
states joined the SCO was to jointly oppose the OSCE's efforts 
to foster free and fair elections in the region.
---------------------------------------------------------------------------
    \187\ Helsinki Commission, Opening Statement by Co-Chairman Sen. 
Sam Brownback, The Shanghai Cooperation Organization: Is it Undermining 
U.S. Interests in Central Asia? September 26, 2006.
---------------------------------------------------------------------------

Environment

    Central Asia's environmental concerns with China include 
the diversion of water resources, the spread of wind-blown 
dust, and damage associated with the activities of Chinese 
energy firms. Efforts to cooperate in the use of water 
resources and to ameliorate sandstorms remain rudimentary, 
according to many observers. China's efforts to divert Irtysh 
River water to its Xinjiang region have raised concerns in 
Russia and Kazakhstan and resulted in negotiations. Kazakhstan 
also has raised concerns about China's increasing use of water 
from the Ili River, which drains into Kazakhstan's Lake 
Balkhash. If the water level in the lake--the third largest 
water body in Central Asia--greatly decreases, some observers 
warn, the regional climate could be harmed.\188\ Chinese firms 
reportedly had considered participating in building a dam on 
the Zarafshon River in Tajikistan for hydro-electricity 
production. After Uzbekistan raised concerns that downstream 
water flows would be disrupted, however, Chinese firms 
allegedly decided not to participate.\189\Efforts to ameliorate 
sandstorms in Central Asia and China require cooperation with 
other possible sources of dust, including Mongolia.\190\
---------------------------------------------------------------------------
    \188\ U.N. Economic and Social Commission for Asia and the Pacific, 
``Central Asia and the Caucasus,'' State of the Environment in Asia and 
the Pacific 2005, April 2006, p. 202; Marina Kozlova, ``Kazakhstan: 
China's Draining of Kazakh Lake Imperils Region,'' Inter Press Service/
Global Information Network, November 6, 2006.
    \189\ CEDR, August 1, 2007, Doc. No. CEP-950066; October 4, 2007, 
Doc. No. CEP-950294.
    \190\ He Sheng and Xiao Guo, ``Scientists Chart Route of Fierce 
Sandstorms,'' China Daily, January 28, 2003.
---------------------------------------------------------------------------
    China's major energy firm, CNPC, has followed the examples 
of other foreign energy firms in Kazakhstan of stressing that 
it adheres both to the letter and spirit of environmental laws. 
CNPC carries out environmental protection work in communities 
near its facilities and claims that it is more protective of 
the environment than other foreign oil and gas companies. In 
late 2006, a Kyrgyz official alleged that Chinese gold mining 
had polluted river water in southern Kyrgyzstan.\191\
---------------------------------------------------------------------------
    \191\ CEDR, October 3, 2007, Doc. No. CEP-950386.
---------------------------------------------------------------------------

Sustainable Development

    Observers disagree about the ultimate effects of Chinese 
economic influence in Central Asia. Some view China as an 
engine of economic modernization and globalization in the 
region. As economic growth accelerates in the region, Xinjiang 
also benefits economically, and the poverty that could 
contribute to disorder fades away, according to these 
observers. They endorse China's efforts to build trade and 
transport links as a major driver in the integration of Central 
Asia. For instance, plans for building the Turkmen gas pipeline 
through Uzbekistan may also have contributed to similar 
Turkmen-Uzbek initiatives on railways and roads, these 
observers suggest. Similarly, China's efforts to encourage 
accession by all the states to the World Trade Organization 
(Kyrgyzstan already is a member) promises to foster regional 
trade as well as better access to world markets.
    Other observers view China as vitiating economic 
development in Central Asia, with the region becoming merely a 
natural resource base and a market for Chinese goods. One group 
of analysts warned that ``if the present trend continues, with 
Central Asia serving mainly as a natural resource base for 
China and Russia, it will erode the region's processing 
industries and drain capital.'' \192\ One Kazakh newspaper 
called for Kazakh officials to negotiate a trade agreement with 
China that would encourage the domestic development of light 
industry and food production by limiting Chinese exports in 
these sectors. Concerns also have been raised that the 
repayment of Chinese loans, even at low rates of interest, 
could become a burden to regional governments. These observers 
also assert that by stressing authoritarianism, China 
ultimately discourages the development in the region of 
sustainable market economies based on the rule of law.\193\
---------------------------------------------------------------------------
    \192\ Niklas Swanstrom, Nicklas Norling, and Zhang Li, ``China,'' 
p. 413.
    \193\ CEDR, September 7, 2007, Doc. No. CEP-950007; Ablat Khojaev, 
Central Asia and the Caucasus, No. 3 (2007).
---------------------------------------------------------------------------

Constraints on Chinese Influence

    Constraints on the growth of Chinese economic influence in 
Central Asia include the poor transportation, banking, 
communications, and other infrastructure in much of the region 
and the massive investments that must be made to upgrade them. 
Some potential Chinese investors also have complained that 
regional governments remain somewhat hostile or indifferent to 
the development of free market economies. Managerial and other 
skills necessary for building market economies remain in short 
supply. High levels of crime and corruption also create risks 
for Chinese investment. Chinese analyst Zhao Changqing claims 
that another constraint is China's current inability to offer 
as much foreign aid in grant form as Western countries.\194\ In 
the security realm, the Central Asian states remain largely 
dependent on Russia for military and other equipment and 
training, and Russia retains military bases and facilities in 
Kazakhstan, Kyrgyzstan, and Tajikistan.\195\ Central Asian 
elites also remain linked to Russia by language and culture, 
since many were trained in Soviet-era schools and speak the 
Russian language. Reportedly, there are region-wide shortages 
of Chinese translators to facilitate communications.
---------------------------------------------------------------------------
    \194\ CDR, July 30, 2007, Doc. No. CPP-508001. The United States 
has been the largest provider of grant assistance to Central Asia, 
amounting to $4.05 billion from fiscal year 1992 through fiscal year 
2006, followed by the European Union's approximately 1.39 billion euros 
($2.13 billion at current exchange rates).
    \195\ According to analyst Roger McDermott, the Central Asian 
states would be less likely to ask China (under the aegis of SCO 
membership) than Russia (under the aegis of membership in the 
Collective Security Treaty Organization) for military support in case 
of a terrorist incident, partially because of the availability of 
elements of the Rapid Deployment Forces of the CSTO based in 
Kyrgyzstan. The Rising Dragon: SCO Peace Mission 2007.
---------------------------------------------------------------------------
    Another possible constraint on the growth of Chinese 
influence in Central Asia may be residual suspicions among the 
region's elites and populations about China's intentions, 
perhaps partly based on ethnic prejudices and on memories of 
heightened Sino-Soviet tensions that culminated in border 
clashes in 1969.\196\ Some observers have suggested that such 
sentiments were in evidence during the unrest of Kyrgyzstan's 
``tulip revolution'' in March 2005, during which some Chinese 
businesses were attacked. Kubanychbek Apas, cochairman of the 
El Jurt civic movement and 2005 presidential candidate in 
Kyrgyzstan, appeared to raise suspicions of China's intentions 
in August 2007 when he criticized the SCO as a Chinese tool for 
expansionism and reportedly asserted that ``we believe that 
Kyrgyzstan will shortly be swallowed up by this Chinese Yellow 
Dragon.'' \197\ Kyrgyz popular concerns about Chinese traders 
appeared evident in a regulation issued by the government in 
January 2007 that would sharply limit the role of foreigners in 
trade activities (similar to a regulation that Russia had put 
in place). The Chinese embassy criticized the regulation as 
possibly harming 4,000-5,000 Chinese traders.\198\
---------------------------------------------------------------------------
    \196\ Helsinki Commission, Testimony by Martha Olcott, September 
26, 2006.
    \197\ CEDR, August 22, 2007, Doc. No. CEP-311001.
    \198\ CEDR, November 24, 2006, Doc. No. CEP-950189. A law passed by 
the Kyrgyz legislature in April 2007 similarly aimed to sharply limit 
the number of work permits granted to foreigners.
---------------------------------------------------------------------------
    The treatment by China of its ethnic populations of 
Uighurs, Kazakhs, and Kyrgyz, including allegations that ethnic 
Han are favored by Chinese authorities to trade with Central 
Asia, may also contribute to popular concerns in Central 
Asia.\199\ Tensions associated with Chinese workers may have 
been evident in Kazakhstan in August 2007 when about 300 Kazakh 
workers took part in a strike at the Janajol oilfield against 
their employer, a Chinese-Kazakh joint-stock company, claiming 
that their demands to obtain pay and living conditions equal to 
that provided to the Chinese workers were not being 
addressed.\200\
---------------------------------------------------------------------------
    \199\ Sabastien Peyrouse, ``The Economic Aspects of the Chinese-
Central Asia Rapprochement,'' p. 12.
    \200\ CEDR, August 17, 2007, Doc. No. CEP-950205; January 10, 2007, 
Doc. No. CEP-950253.
---------------------------------------------------------------------------
    Some analysts suggest that trans-border terrorism and 
organized crime activities such as drug and arms trafficking 
may contribute to regional hesitancy to substantially ease 
controls on trans-border trade and travel, and that such 
controls may somewhat delay China's drive for commercial 
dominance in Central Asia.\201\ Reflecting organized crime 
concerns, one Kazakh analyst complained that the government 
still had not been able to wrest control over goods 
transportation from crime networks, even after many Kazakh 
customs and other officials had been arrested in 2005.\202\
---------------------------------------------------------------------------
    \201\ Niklas Swanstrom, Nicklas Norling, and Zhang Li, ``China,'' 
p. 410.
    \202\ CEDR, August 3, 2006, Doc. No. CEP-950264; January 20, 2006, 
Doc. No. CEP-311003.
---------------------------------------------------------------------------
    Analyst Svante Cornell of Johns Hopkins University argues 
that while China is interested in Central Asia as an energy 
source and as a commercial market, the region is not China's 
top national security priority, so it does not seek regional 
hegemony. He states that ``China's security challenges lie to 
the East, with the Taiwan issue looming large over its foreign 
policy, and relations to the Korean peninsula and Japan 
following closely.'' \203\
---------------------------------------------------------------------------
    \203\ Svante Cornell, ``The United States and Central Asia: In the 
Steppes to Stay?,''Cambridge Review of International Affairs, Vol. 17, 
No. 2 (July 2004).
---------------------------------------------------------------------------

                    IMPLICATIONS FOR U.S. INTERESTS

    U.S. policy has emphasized bolstering the security of the 
Central Asian states to help them combat terrorism, 
proliferation, and arms trafficking. Other strategic U.S. 
objectives have included promoting free markets, 
democratization, human rights, and energy development. Such 
policies aim to help the states become what the Administration 
considers to be responsible members of the international 
community rather than to degenerate into xenophobic, extremist, 
and anti-Western regimes that threaten international peace and 
stability.
    The Administration's diverse goals in Central Asia have 
reflected the differing characteristics of these states. U.S. 
interests in Kazakhstan have included securing and eliminating 
Soviet-era nuclear and biological weapons materials and 
facilities. U.S. energy firms have invested in oil and natural 
gas development in Kazakhstan and Turkmenistan. Economic and 
democratic reforms and border security have been among U.S. 
concerns in Kyrgyzstan. In Tajikistan, U.S. aid has focused on 
economic reconstruction following that country's 1992-1997 
civil war. U.S. relations with Uzbekistan suffered following 
the Uzbek government's violent crackdown on armed and unarmed 
protesters in the city of Andijon in May 2005.
    The United States has encouraged the Central Asian states 
to become responsible members of the international community, 
supporting integrative goals through bilateral aid and through 
coordination with other aid donors. The stated policy goal is 
to discourage radical anti-democratic regimes and terrorist 
groups from gaining influence. All the Central Asian leaders 
publicly embrace Islam but display hostility toward Islamic 
fundamentalism. At the same time, they have established some 
trade and aid ties with Iran. Although they have had greater 
success in attracting development aid from the West than from 
the East, some observers argue that, in the longer run, their 
foreign policies may not be anti-Western but may more closely 
reflect some concerns of other Islamic states. Some Western 
organizational ties with the region have suffered in recent 
years, in particular those of the OSCE, which has been 
criticized by some Central Asian governments due to its 
emphasis on democratization and respect for human rights.\204\
---------------------------------------------------------------------------
    \204\ See also CRS Report RL30294, Central Asia's Security: Issues 
and Implications for U.S. Interests, by Jim Nichol.
---------------------------------------------------------------------------
    After September 11, 2001, all the Central Asian states soon 
offered overflight and other assistance to U.S.-led anti-
terrorism efforts in Afghanistan. The states were predisposed 
to welcome such operations. Tajikistan and Uzbekistan had long 
supported the Afghan Northern Alliance's combat against the 
Taliban, and all the Central Asian states feared Afghanistan as 
a base for terrorism, crime, and drug trafficking (even 
Turkmenistan, which tried to reach some accommodation with the 
Taliban). The United States established two bases in the 
region, one at the town of Karshi-Khanabad in Uzbekistan and 
another just outside Kyrgyzstan's capital of Bishkek at the 
Manas international airport.
    In early July 2005, the presidents of China, Russia, 
Uzbekistan, Kyrgyzstan, and Tajikistan signed a declaration 
issued during an SCO Summit that called for the eventual 
closure of U.S. and NATO military bases in Central Asia used 
for operations in Afghanistan (see above, SCO). Despite this 
declaration, none of the Central Asian leaders immediately 
called for closing the bases. However, after the United States 
and others interceded so that refugees who fled from Andijon to 
Kyrgyzstan could fly to Romania, Uzbekistan on July 29 demanded 
that the United States vacate Karshi-Khanabad within six 
months. On November 21, 2005, the United States officially 
ceased operations to support Afghanistan at Karshi-Khanabad. 
Many activities at Karshi-Khanabad shifted to the Ganci airbase 
in Kyrgyzstan.
    Some observers view the closure of the base and souring 
U.S.-Uzbek relations as setbacks to U.S. influence in the 
region and as gains for Russian and Chinese influence. Others 
suggest that U.S. ties with other regional states provided 
continuing influence and that U.S. criticism of human rights 
abuses might pay future dividends among regional 
populations.\205\ Among the observers with the former view, 
Niklas Swanstrom of Uppsala University in Sweden asserts that 
China intends to create what ``could be compared to a classical 
vassal relationship . . . This can be seen in the aggressive 
investment, military and political initiatives in the region . 
. . '' He thinks that China will gain influence at Russia's 
expense, and that the United States will be able to retain a 
presence in the region. \206\ On the other hand, analyst 
Stephen Blank of the U.S. Army War College seemingly views 
Russia as gaining influence in the region at the expense of 
China (although both are mostly cooperating in the near term in 
efforts to push the United States out).\207\
---------------------------------------------------------------------------
    \205\ On growing Chinese regional influence, see Michael Mihalka, 
``Counter-insurgency, Counter-terrorism, State-Building and Security 
Cooperation in Central Asia,'' The China and Eurasia Forum Quarterly, 
May 2006.
    \206\ Niklas Swanstrom, Journal of Contemporary China, p. 584
    \207\ Stephen Blank, U.S. Interests in Central Asia and the 
Challenges to Them, Strategic Studies Institute, U.S. Army War College, 
March 2007.
---------------------------------------------------------------------------
    China's attitude toward a continuing U.S. military presence 
in the region remains a subject of debate. China benefited from 
the U.S.-led coalition actions in Afghanistan against the 
Islamic Movement of Uzbekistan (IMU) terrorist group and the 
Taliban, since these groups had been providing training and 
sustenance to Uighur extremists. The United States also 
supported China's efforts to combat terrorism in the region by 
designating the ETIM as a terrorist group. Although China 
supported the SCO declaration that called for eventually 
closing coalition bases in Central Asia (see above), some 
observers view China as opposing Russia's calls for the SCO to 
become more stridently anti-American.\208\ On the other hand, 
analyst Roger McDermott of the Jamestown Foundation argues that 
China and Russia support SCO military exercises as 
demonstrations to the Central Asian states that the U.S. 
security presence in the region is no longer necessary.\209\
---------------------------------------------------------------------------
    \208\ CDR, August 18, 2007, Doc. No. CPP-94003. Sheives and Olcott 
state that it is incorrect to view the SCO as a military alliance 
opposed to NATO. Kevin Sheives, ``China Turns West: Beijing's 
Contemporary Strategy,'' Pacific Affairs, June 22, 2006; Helsinki 
Commission, The Shanghai Cooperation Organization: Is it Undermining 
U.S. Interests in Central Asia? Testimony by Martha Olcott, September 
26, 2006.
    \209\ Roger McDermott, The Rising Dragon: SCO Peace Mission 2007.
---------------------------------------------------------------------------
    Some analysts have viewed apparent U.S. setbacks in the 
region--and putative gains by Russia and China--as reflecting 
regional disappointment with low levels of U.S. assistance 
after expectations in the region were raised by U.S. 
expressions of support after 9/11. According to this argument, 
Uzbekistan expected a substantial increase in U.S. economic and 
military assistance after it granted basing privileges at 
Karshi-Khanabad, and was disappointed by the actual amounts 
granted.\210\ This disappointment, along with U.S. criticism of 
human rights conditions in Uzbekistan, may have spurred 
Uzbekistan to re-evaluate its ties with the United States (and 
the EU) and to improve its ties with China and Russia. This 
process may have begun even before the civil unrest in the city 
of Andijon in May 2005 (that led to U.S. and EU criticism of 
the Uzbek government's crackdown), as evidenced by a joint 
declaration on strengthening cooperation and friendship signed 
in June 2004 by visiting President Hu Jintao and President 
Karimov.
---------------------------------------------------------------------------
    \210\ The United States provided $239.78 million in assistance to 
Uzbekistan in FY2002 (FREEDOM Support Act and agency budgets), $83.46 
million in FY2003, $85.44 million in FY2004, and $75.87 in FY2005. U.S. 
Department of State, Office of the Coordinator of Assistance to Europe 
and Eurasia, U.S. Government Assistance to and Cooperative Activities 
with Eurasia, FY2002-FY2005 annual reports.
---------------------------------------------------------------------------
    U.S. officials appear to view the SCO with caution. In his 
testimony at a hearing in September 2006, Assistant Secretary 
of State Richard Boucher stated that the United States had not 
asked to participate in the SCO, and that ``in terms of our 
cooperation with the region, we don't think this is a 
particularly helpful organization. It's certainly not one that 
we would want to back, or sponsor, or promote in any way. We 
think our money, our energy, our time is better invested in 
working with the individual countries and working with the 
organizations that take a broader view, the NATO, the OSCE, the 
European Union, other partners, Japan, working with them in the 
region, people who are interested in all aspects of cooperation 
in that region.'' \211\
---------------------------------------------------------------------------
    \211\ Testimony by Assistant Secretary of State Richard A. Boucher, 
Bureau of South and Central Asian Affairs, Hearing, The SCO: Is It 
Undermining U.S. Interests in Central Asia? September 26, 2006.
---------------------------------------------------------------------------
    Deputy Assistant Secretary of State Evan Feigenbaum 
appeared to take a more equivocal position about the role of 
the SCO in a talk in September 2007, where he stated that ``we 
in the United States are still struggling to sort fact from 
fiction, to distinguish statements from actions, and to 
differentiate what is `good' for our interests from what might 
be rather less productive.'' He discounted speculation that the 
SCO is a ``new Warsaw Pact'' (a former Soviet-East European 
security alliance), because the Central Asian states cooperate 
militarily with the United States and participate in NATO's 
Partnership for Peace initiative. He also stressed that the 
United States has trade and investment ties with the Central 
Asian states. He stated that the United States hopes that China 
and Russia as members of the SCO are not colluding against a 
U.S. presence in Central Asia. Instead, he called for SCO 
members to help Afghanistan develop economically and to embrace 
an ``open, market-based approach to global energy supply and 
security,'' rather than attempting to form an energy 
cartel.\212\
---------------------------------------------------------------------------
    \212\ Evan Feigenbaum, Deputy Assistant Secretary of State for 
South and Central Asian Affairs, The Shanghai Cooperation Organization 
and the Future of Central Asia, The Nixon Center, September 6, 2007.
---------------------------------------------------------------------------
    Several U.S. officials and analysts argue that the United 
States should continue to stress cooperation among Russia, 
China, the EU, and other outside powers in assisting the 
Central Asian states to develop and safeguard their 
independence and security.\213\ Svante Cornell argues that the 
United States should attempt to assuage China's ``alarmist'' 
thinking that the U.S. military presence in Central Asia is 
aimed at containing China by stressing that the presence is 
part of the larger Global War on Terrorism, which aids China's 
security.\214\ Among the Central Asian policies on which the 
United States and China diverge, the most prominent have been 
those on democratization goals and respect for human rights. 
Some observers suggest that the United States reduce the 
priority it places on these goals in order to emphasize 
cooperation with China and Central Asia on the GWOT and other 
common interests. Others, however, argue that uncritical U.S. 
relations with the region's authoritarian regimes undermine 
long-term U.S. interests in democratization and respect for 
human rights. The United States also diverges somewhat with 
China by stressing the development of multiple trade and 
transport links from the region to the outside world, including 
South Asian and trans-Caspian energy links, while China 
emphasizes its own links to the region.\215\
---------------------------------------------------------------------------
    \213\ The argument that world powers should cooperate rather than 
compete in the development of Central Asia was emphasized by former 
Deputy Secretary of State Strobe Talbott, A Farewell to Flashman: 
American Policy in the Caucasus and Central Asia, Address at the Johns 
Hopkins School of Advanced International Studies, July 1997.
    \214\ Svante Cornell, ``The United States and Central Asia: In the 
Steppes to Stay?,'' p. 251.
    \215\ Analyst Ariel Cohen of the Heritage Foundation urges that the 
United States seek cooperation with India, China, and Pakistan ``to 
create alternatives to the Russian energy transit monopoly by 
establishing new energy transit routes (pipelines, shipping lines, and 
railroads) that head west and, in some cases, east and south.'' U.S. 
Interests and Central Asia Energy Security, Heritage Foundation, 
Backgrounder No. 1984, November 15, 2006.
---------------------------------------------------------------------------
                              ----------                              


                          Southeast Asia\216\

---------------------------------------------------------------------------
    \216\ Prepared by Bruce Vaughn, Specialist in Asian Affairs; Thomas 
Lum, Specialist in Asian Affairs; and Wayne Morrison, Specialist in 
International Trade and Finance, Foreign Affairs, Defense, and Trade 
Division, CRS.
---------------------------------------------------------------------------

                                OVERVIEW

    For many analysts, China's growing influence or soft power 
in Southeast Asia is largely economic, stemming from its 
rapidly expanding role as a major source of foreign aid, trade, 
and investment. The PRC has also wielded power in the region 
through diplomacy and, to a lesser extent, admiration of China 
as a model for development and ancient culture, and an emphasis 
on ``shared Asian values.'' In addition, overseas Chinese 
communities have long played important parts in the economies, 
societies, and cultures of Southeast Asian states. Along with 
offering economic inducements, China has allayed concerns that 
it poses a military or economic threat, assured its neighbors 
that it strives to be a responsible member of the international 
community, and produced real benefits to the region through 
aid, trade, and investment.\217\
---------------------------------------------------------------------------
    \217\ In the Southeast Asian context, Chinese ``soft power'' can 
include ``economic benefits, shared norms and values, cooperation on 
nontraditional issues, infatuation with the new China, the mutual 
benefits of tourism and education, diplomacy and style, and networking 
and reciprocal obligations within ethnic Chinese communities.'' See 
Bronson Percival, The Dragon Looks South: China and Southeast Asia in 
the New Century, (Westport: Praeger Publishers, 2007), pp.111-112. See 
also Hugo Restall, ``China's Bid for Asian Hegemony,'' Far Eastern 
Economic Review, May 2007.
---------------------------------------------------------------------------
    China may be gaining on the United States in the areas of 
cultural and political soft power as well, at least in some 
countries in the region. A 2007 Pew Research poll found that 
only 29% of Indonesians and 27% of Malaysians polled had a 
favorable view of the United States as opposed to 83% of 
Malaysians and 65% of Indonesians who had favorable views of 
China. Americans themselves are more popular than their 
country, with 42% of Indonesians having a favorable view 
towards Americans in 2007. The figure for Indonesia is up 
slightly from a favorable view of only 15% in 2003 but remains 
well below the 2000 rate of 75%.\218\ One striking exception to 
this trend is the Philippines, which ranks first in the world 
in trusting the United States to act responsibly in global 
affairs, according to a 2007 survey.\219\ Such trends in polls 
led Joseph Nye to state that `` . . . although China is far 
from America's equal in soft power, it would be foolish to 
ignore the gains it is making. ..It is time for the U.S. to pay 
more attention to the balance of soft power in Asia.'' \220\
---------------------------------------------------------------------------
    \218\ The Pew Global Attitudes Project, ``Global Unease with Major 
Powers,'' June 2007.
    \219\ ``Filipinos Rank High in Supporting the U.S. in World 
Affairs, According to 18-Nation Survey,'' Social Weather Stations 
(Manila), June 2007.
    \220\ Joseph Nye, ``The Rise of China's Soft Power,'' Wall Street 
Journal, December 29, 2005.
---------------------------------------------------------------------------
    China has sought to boost its economic and trade relations 
with the 10 countries that comprise the Association of 
Southeast Asian Nations (ASEAN).\221\ According to U.S. and 
Chinese trade data, Chinese total trade (exports and imports) 
with ASEAN exceeded that of the United States in 2007 for the 
first time since ASEAN was established (1967). A free trade 
agreement (FTA) between China and ASEAN, signed in 2002, and 
currently being implemented (2005 2015), will likely boost 
economic ties further. Many U.S. analysts have expressed 
concern that China's growing economic ties will enhance its 
influence in the region at the expense of U.S. interests, and 
some have called on the United States to pursue an FTA with 
ASEAN or with more of its members.
---------------------------------------------------------------------------
    \221\ ASEAN members include Indonesia, Malaysia, the Philippines, 
Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar (Burma), and 
Vietnam. Note: Cambodia was not a Member of ASEAN until 1999. For the 
sake of consistency, we included data for Cambodia in the 1997 data.
---------------------------------------------------------------------------

                               DIPLOMACY

    China's posture in Southeast Asia has undergone a 
transformation in the past decade. The PRC's support for 
various communist insurgencies in the region during the Cold 
War, its military response to Vietnam's incursion into Cambodia 
in 1979, and its forceful claims to disputed islands in the 
South China Sea during the 1990s, created strains with its 
neighbors in the region. However, since the Asian financial 
crisis of 1997, China increasingly has emphasized mutual 
benefits, or soft power over hard power or the threat of hard 
power, in its relations with Southeast Asian states. In 1997, 
during the Asian financial crisis, China won praise in the 
region when it refrained from devaluing its currency, which 
helped to stabilize the region's economy. In 2002, China and 
other claimants to disputed islands signed an agreement and a 
Declaration on the Conduct of Parties in the South China Sea, 
which greatly reduced tensions on this issue. While there is a 
general agreement that China's tactics have changed to a more 
accommodating posture with an emphasis on soft power, there is 
less certainty regarding its implications and whether China's 
goals have changed accordingly.

Bilateral and Sub-Regional Relations

    An analysis of China's bilateral relations with Southeast 
Asia leads to a sub-regional division between its relatively 
more influential position with mainland Southeast Asian states, 
particularly Burma, Cambodia, and Laos, and its relatively less 
influential position with maritime Southeast Asian states 
(Indonesia, the Philippines, and Singapore).\222\ Thailand, a 
major non-NATO ally of the United States, while more 
independent than Burma, Laos, and Cambodia, appears to be 
relatively more comfortable with close relations with China 
than other regional states. Muslims in the region (Indonesia, 
Malaysia) look not so much to China as they do to the rest of 
the Muslim world for models outside their national settings. 
Given that Muslims represent approximately half the population 
of Southeast Asia, and are concentrated in maritime Southeast 
Asia, this should place limits on the extent of Chinese 
influence there. Vietnam's unique historical relationship with 
China, which includes past domination by China and a more 
recent border war, will also place limits on the extent to 
which those two nations will likely come together. Singapore, 
the most strategic thinking and trade dependent state in the 
region, has promoted a balanced approach to the involvement of 
great powers in its region.
---------------------------------------------------------------------------
    \222\ Percival, op. cit.
---------------------------------------------------------------------------
    A core difference between China's and America's soft power 
in Southeast Asia is the organizing principle of their 
respective approaches. Both countries' foreign policy 
approaches to the region reflect an array of priorities 
including geopolitical, security, and trade interests. That 
said, the U.S. approach includes an emphasis on democracy and 
related objectives along with its main theme of promoting U.S. 
security interests. By contrast, China's ``non-interference'' 
policy is less intrusive in the domestic affairs of regional 
states. While this approach may not garner widespread 
admiration, it is more palatable to relatively authoritarian 
regimes in the region, and sometimes earns public appreciation 
because it appears respectful of national sovereignty.
    China's changed bilateral relations with Australia are an 
interesting parallel to recent dynamics in Southeast Asia and 
demonstrate how the economic aspect of soft power can transform 
a bilateral relationship with a state that is a close treaty 
ally of the United States. Australia's strong economic growth 
in recent years has been to a large extent based on exports of 
raw materials to China. This has produced a reticence to adopt 
policies that could anger China. It has even led to some 
discussion of whether the Australia-New Zealand-United States 
(ANZUS) alliance pertains to potential future conflict over 
Taiwan. Australia clearly does not want to be forced to choose 
between its robust and important security alliance with the 
United States and its rapidly growing and lucrative trade with 
China.\223\
---------------------------------------------------------------------------
    \223\ For further information, see: CRS Report RL33010, Australia: 
Background and U.S. Relations, by Bruce Vaughn.
---------------------------------------------------------------------------

Regional Organizations

    As discussed in the section on North East Asia, China has 
been an increasingly active player in multilateral 
organizations that include Southeast Asian states such as ASEAN 
plus three--ASEAN, China, Japan, and South Korea--and the East 
Asia Summit (EAS), which includes China, Japan, South Korea, 
India, Australia, and New Zealand, as well as the ASEAN states. 
The diplomacy surrounding the formation of the EAS in 2005 is 
particularly noteworthy. The lack of U.S. involvement with the 
EAS contrasts sharply with the central role that the United 
States has played in the Asia Pacific Economic Cooperation 
(APEC) group.\224\
---------------------------------------------------------------------------
    \224\ For further information, see: CRS Report RL33242, East Asia 
Summit (EAS): Issues for Congress, by Bruce Vaughn.
---------------------------------------------------------------------------
    The formation of the EAS also demonstrated the differing 
levels of comfort that ASEAN member states have with China. 
Some ASEAN states preferred bringing in India, Australia, and 
New Zealand as a non-American balance to Chinese influence. One 
factor that appears to be in China's favor is increased 
regional support for a ``more Asia-oriented grouping.'' This 
reflects the desire on the part of some regional states for a 
more Asia-centered focus rather than a trans-Pacific group that 
would include the United States.\225\ Movement in this 
direction can be traced back to former Prime Minister Mahathir 
Mohammad of Malaysia who, in the 1990s, advocated an Asian 
state-only grouping through the East Asia Economic Caucus.
---------------------------------------------------------------------------
    \225\ Richard W. Hu ``China and East Asian Community-Building: 
Implications & Challenges Ahead,'' The Brookings Institution, 
presentation on October 2, 2007.
---------------------------------------------------------------------------

               A COMPARISON OF U.S. AND CHINESE ECONOMIC 
                          RELATIONS WITH ASEAN

    Over the past decade, China's trade with ASEAN has expanded 
sharply in terms of trade volume, percentage increase, and size 
relative to U.S. trade levels. According to Chinese data, from 
1997-2007, its exports to, and imports from, ASEAN countries 
grew by 642% and 777% respectively.\226\ The importance of 
China to the economies of ASEAN in terms of trade, investment, 
and tourism has also increased sharply. These trends are 
expected to continue in the years ahead as economic ties 
continue to deepen as a result of the implementation of the 
China-ASEAN Free Trade Agreement (FTA) and other cooperative 
initiatives.\227\ China's soft power in the region is expected 
to grow as Southeast Asian economies become more dependant upon 
or integrated with the PRC. While the United States remains an 
important partner for ASEAN in terms of trade, the relative 
importance of that trade to ASEAN has declined.
---------------------------------------------------------------------------
    \226\ China's trade data often differ significantly with that of 
its trading partners, due in large part because of the way trade 
through Hong Kong is counted. China counts Hong Kong as the destination 
of its exports sent there, even goods that are then transshipped to 
other markets. By contrast, the United States and many of China's other 
trading partners count Chinese exports that are transshipped through 
Hong Kong as products from China, not Hong Kong, including goods that 
contain Hong Kong components or involve final assembly or processing in 
Hong Kong. See also CRS Report RS22640, What's the Difference--
Comparing U.S. and Chinese Trade Data, by Michael F. Martin.
    \227\ In addition, both China and ASEAN continue to enjoy rapid 
economic growth. China's real GDP growth in 2007 was 11.4% and ASEAN's 
was an estimated 6.5%.
---------------------------------------------------------------------------

Comparing U.S. and Chinese Trade With ASEAN

    According to PRC data, Chinese imports from ASEAN from 1997 
to 2007 rose from $12.4 billion to $94.2 billion, while U.S. 
imports from ASEAN (according to U.S. trade data) grew from 
$71.0 billion to $111.2 billion (see Table 8, and Figures 19 
and 20).\228\ China's exports went from $12.7 billion to $94.2 
billion, while U.S. exports increased from $48.3 billion to 
$60.6 billion. Total U.S. trade (exports plus imports) with 
ASEAN in 2006 was slighter larger than that of China's. 
However, in 2007, China's total trade with ASEAN was 17% larger 
than total U.S. trade ($200.6 billion versus $171.7 billion). 
China's exports to ASEAN in 2007 were 55.6% higher than those 
from the United States, while U.S. imports from ASEAN were 2.6% 
larger than China's imports.\229\ Based on the fact that 
China's imports from ASEAN in 2007 grew by 21.1% (over the 
previous year), versus 12.4% for the United States, it is 
likely that China's imports from ASEAN will be larger than U.S. 
imports in 2008. China ran a $14.1 billion trade deficit with 
ASEAN, while the U.S. trade deficit totaled $50.6 billion.
---------------------------------------------------------------------------
    \228\ China reports imports on a cost, insurance, and freight (CIF) 
basis, while the U.S. reports imports on a customs basis, which 
excludes the added cost of insurance, freight and other charges. If the 
U.S. reported imports on a CIF basis, it would raise the value of 
imports by about 10%.
    \229\ In comparison, in 1997, China's official reported exports to 
ASEAN were 26.3% as large as those by reported by the United States and 
its reported imports from ASEAN were 17.4% as large as U.S. imports.
---------------------------------------------------------------------------
    Taken as a whole, ASEAN's rank as a destination for Chinese 
exports was 4th in 1997 and 2007, while ASEAN's rank for U.S. 
exports dropped from 4th in 1997 to 5th in 2007. As a source of 
Chinese imports, ASEAN's rank increased from 5th to 2nd, while 
its rank for U.S. imports fell from 4th to 5th. The share of 
China's exports going to ASEAN grew from 7.0% to 7.7%, while 
the share of U.S. exports to ASEAN dropped from 7.0% to 5.2%. 
The share of China's imports from ASEAN rose from 9.0% to 
11.3%, while the share of U.S. imports from ASEAN dropped from 
8.2% to 5.7%.

                                   Table 8. Chinese and U.S. Trade With ASEAN
----------------------------------------------------------------------------------------------------------------
                                                                                           2006-2007   1997-2006
                                                         1997        2006        2007       Percent     Percent
                                                                                            Change      Change
----------------------------------------------------------------------------------------------------------------
China's Exports to ASEAN ($millions)................      12,698      71,325      94,243        32.1       642.2
U.S. Exports to ASEAN ($millions)...................      48,468      57,307      60,560         5.7        35.3
China's Exports to ASEAN as a Percent of Total               7.0         7.4         7.7          --          --
 Exports (%)........................................
U.S. Exports to ASEAN as a Percent of Total Exports          7.0         5.5         5.2          --          --
 (%)................................................
China's Imports From ASEAN ($millions)..............      12,357      89,538     108,381        21.1       777.1
U.S. Imports From ASEAN ($millions).................      70,981     111,201     111,171        12.4        56.6
China's Imports From ASEAN as a Percent of Total....         9.0        11.3        11.3          --          --
U.S. Imports From ASEAN as a Percent of Total.......         8.2         6.0         5.7          --          --
----------------------------------------------------------------------------------------------------------------
Source: World Trade Atlas.
Note: Based on official Chinese and U.S. trade data.

             Figure 19. U.S. and Chinese Exports to ASEAN: 
                               1997-2007



                                     

            Figure 20. U.S. and Chinese Imports From ASEAN: 
                               1997-2007



                                     

Energy

    China's mineral fuel imports from ASEAN rose from $3.3 
billion in 1997 to $8.3 billion in 2007. However, China's 
mineral fuel imports from ASEAN as a percent of China's total 
mineral fuel imports declined from 26.8% in 1997 to 7.7% over 
this period. Despite this drop, China has been active in 
developing ties with ASEAN countries on a number of energy 
related projects.\230\ To illustrate:
---------------------------------------------------------------------------
    \230\ Although China has pursued a number of energy related 
activities with various ASEAN countries, the PRC is also engaged in 
territorial disputes with some ASEAN countries (such as Vietnam, 
Malaysia, and the Philippines) over territory in the South China Sea 
that may contain oil and gas deposits.


   In January 2007, the Xinhua News Agency reported that China 
        National Petroleum Corporation signed production 
        sharing contracts with Myanmar's Ministry of Energy 
        covering crude oil and natural gas exploration projects 
        in three deep-water blocks off the western Myanmar 
        (Burma) coast; Reuters reported that a Chinese oil 
        company would join with two other foreign firms in 
        investing $5.5 billion to produce biofuels in 
        Indonesia; and Dow Jones Chinese Financial Wire 
        reported that the Vietnamese government had recently 
        authorized state-owned PetroVietnam to begin joint oil 
        and gas operations with China National Offshore Oil 
---------------------------------------------------------------------------
        Corporation in the Gulf of Tonkin.

   In April 2007, the Xinhua News Agency reported that China 
        would build a pipeline from the Myanmar (Burma) port 
        city of Sittwe to Kunming, China to transport natural 
        gas.

   In May 2007, BBC Monitoring reported that two Chinese firms 
        planned to invest $343 million in an oil refinery and a 
        gas processing plant in Pahang, Malaysia.

   In June 2007, the Xinhua News Agency reported that China's 
        National Offshore Oil Corporation signed a production-
        sharing contract with the Cambodian National Petroleum 
        Authority to explore for oil and natural gas.

   In July 2007, Interfax China reported that Chinese oil 
        companies planned to invest as much as $14 billion in 
        Indonesia's oil and gas exploration sectors; and the 
        Vietnam News Brief Services announced that the 
        government planned to jointly build a $360 million oil 
        refinery with China in Vietnam.

   In September 2007, the Xinhua News Agency reported that 
        China would build an oil pipeline from Myanmar (Burma) 
        to Chongqing, China.

   In December 2007, the Xinhua News Agency reported that 
        China and Singapore had signed an agreement to begin 
        joint research into energy-intensive plant hybrids for 
        biofuels.

The Importance of China and the United States to ASEAN's Trade

    From ASEAN's perspective, China is becoming a major trading 
partner. Using ASEAN data, China ranked as ASEAN's 5th largest 
trading partner in 2005 (the U.S. ranked 2nd) its 5th largest 
export market (the U.S. was 2nd) and its 3rd largest source of 
its imports (the U.S. ranked 4th ).\231\
---------------------------------------------------------------------------
    \231\ Rankings for 2006 were not available. Note: ASEAN trade data 
differ from data reported by China and the United States.
---------------------------------------------------------------------------
    ASEAN data show total trade with the United States and 
China in 2006 at $174.4 billion and $143.8 billion, 
respectively.\232\ As Table 9 indicates, ASEAN exports to China 
as a share of total ASEAN exports rose from 2.1% in 1995 to 
8.9% in 2006 (while the U.S. share fell from 18.5% to about 
13.9%).\233\ The share of ASEAN's imports from China rose from 
2.2% to 11.4% (while the share from the U.S. fell from 14.6% to 
10.3%).\234\
---------------------------------------------------------------------------
    \232\ 2006 data exclude Laos and Myanmar (Burma).
    \233\ ASEAN data indicate that its 2006 exports to the United 
States and China were $105.5 billion and $67.6 billion, respectively.
    \234\ ASEAN imports from the United States and China in 2006 were 
$68.8 billion and $76.2 billion, respectively.

   Table 9. ASEAN Trade with the United States and China for 1995, 2000, and 2006 as a Percent of Total Trade
                                                    (percent)
----------------------------------------------------------------------------------------------------------------
                                                                   1995              2000              2006
----------------------------------------------------------------------------------------------------------------
ASEAN IMPORTS (percent of total)
United States.............................................           14.6              14.0              10.3
China.....................................................            2.2               5.2              11.4
----------------------------------------------------------------------------------------------------------------
ASEAN EXPORTS (percent of total)
United States.............................................           18.5              18.0              13.9
China.....................................................            2.1               3.5               8.9
----------------------------------------------------------------------------------------------------------------
Sources: ASEAN Secretariat, 2005 and 2006 ASEAN Yearbook and International Monetary Fund, Direction of Trade
  Statistics, June 2007.
Notes: Data for 2006 do not include Laos and Myanmar (Burma); ASEAN trade data differ from that reported by its
  trading partners.

Foreign Direct Investment

    Although the importance of the United States to ASEAN trade 
has declined somewhat relative to China, it is still a major 
source of ASEAN's foreign direct investment (FDI). From 2002-
2006, U.S. FDI flows to ASEAN were $13.7 billion (or 8.0% of 
total), making the United States ASEAN's 4th largest source for 
FDI. Over this period, China's FDI totaled $2.3 billion or 1.3% 
of total, making China the 10th overall source of ASEAN's FDI 
(see table 10).\235\ In 2006, U.S. FDI in ASEAN totaled $3.9 
billion versus $937 million for China.
---------------------------------------------------------------------------
    \235\ China estimates cumulative FDI from ASEAN through 2006 at 
$41.9 billion.
---------------------------------------------------------------------------

Tourism

    According to ASEAN tourist data, China was the 3rd largest 
for source of tourist arrivals from 2001 to 2005 at 13.8 
million, accounting for 6.2% of total. The United States ranked 
8th at 9.8 million, accounting for 4.4% of total. In 2005, 
arrivals from China were 3.0 million versus 2.3 million from 
the United States.\236\
---------------------------------------------------------------------------
    \236\ According to Chinese data, from January-November 2006, 3.5 
million tourists from ASEAN countries visited China.
---------------------------------------------------------------------------

China's Efforts to Boost Economic Ties With ASEAN

    China entered into Dialogue relations with ASEAN in 1991 
and obtained full ASEAN Dialogue Partner status in 1996.\237\ 
In 2000, Chinese officials suggested the idea of a China-ASEAN 
FTA. In November 2002, ASEAN and China signed the Framework 
Agreement on Comprehensive Economic Co-operation to create an 
ASEAN-China Free Trade Area (ACFTA) within 10 years.\238\ In 
November 2004, the two sides signed the Agreement on Trade in 
Goods of the Framework Agreement on Comprehensive Economic Co-
operation between the Association of Southeast Asian Nations 
and the People's Republic of China, which included a schedule 
of tariff reductions and eventual elimination for most tariff 
lines (beginning in 2005) between the two sides.\239\
---------------------------------------------------------------------------
    \237\ Current ASEAN Dialogue Partners include Australia, Canada, 
China, the European Union, India, Japan, South Korea, New Zealand, the 
Russian Federation, the United States, and the United Nations 
Development Programme.
    \238\ The agreement included an ``early harvest'' provision to 
reduce and eliminate tariffs on a number of agricultural products (such 
as meats, fish, live animals, trees, dairy produce, vegetables, and 
edible fruits and nuts). The agreement called for both parties to begin 
implementing the cuts beginning in 2004. Thailand negotiated an 
agreement with China to eliminate tariffs for various fruits and 
vegetables, effective October 2003.
    \239\ The ACFTA would implement most tariff reductions between 
China and the ASEAN 6 nations by 2010. Cambodia, Laos, Burma, and 
Vietnam would be able to maintain higher tariffs, but these would be 
phased out and completely eliminated by 2015.

                              Table 10. Major Foreign Investors in ASEAN: 2002-2006
                                            (millions and % of total)
----------------------------------------------------------------------------------------------------------------
                                                                           2006           2002-2006 (Cumulative)
                                                                 ------------------------
                                                                                         -----------------------
                                                                     Value    Percent of              Percent of
                                                                                 Total       Value       Total
----------------------------------------------------------------------------------------------------------------
European Union..................................................      13,362        25.5      44,956        26.3
Japan...........................................................      18,803        18.0      30,814        18.0
ASEAN...........................................................       3,765        11.9      19,368        11.3
United States...................................................       3,865         7.4      13,736         8.0
China...........................................................         937         1.8       2,303         1.3
  Total FDI in ASEAN............................................      52,380          --     170,822          --
----------------------------------------------------------------------------------------------------------------
Source: ASEAN Secretariat.
Note: Ranked according to cumulative investment for 2002-2006.

    For example, for the relatively more developed ``ASEAN6'' 
nations (Brunei, Indonesia, Malaysia, the Philippines, 
Singapore and Thailand), tariff lines of over 20% are to fall 
to 20% in 2005, 12% in 2007, 5% by 2009, and zero by 2010. 
Tariffs between 15% and 20% are to fall to 15% in 2005, 8% in 
2007, 5% by 2009, and zero by 2010. Certain ``sensitive'' 
products have longer phase-out periods.\240\ ASEAN--China 
cooperation covers a variety of areas, including agriculture, 
information and communication technology, human resource 
development, two-way investment, Mekong Basin development, 
transportation, energy, culture, tourism and public health.'' 
\241\ In January 2007, China and ASEAN signed the Agreement on 
Trade in Services of China-A SEAN Free Trade Area which is 
intended to liberalize rules on trade in services.
---------------------------------------------------------------------------
    \240\ Bureau of National Affairs, International Trade Reporter, 
October 6, 2005, p. 1590.
    \241\ A listing of agreements and declarations can be found on the 
Asean Secretariat's website at [http://www.aseansec.org/].
---------------------------------------------------------------------------
    In a 2005 speech to commemorate the 15th anniversary of the 
China-ASEAN Dialogue relations, Chinese Premier Wen Jiabao 
listed four main conclusions that he drew from the growth in 
bilateral relations:


   Peaceful development is the prerequisite for the growth of 
        China-ASEAN relations. Both sides pursue a policy of 
        good neighborliness and friendship, see each other as 
        cooperative partners and take each other's development 
        as an opportunity, not a threat.

   Equality and mutual trust are the foundation of China-ASEAN 
        relations. Both sides treat each other as equals and 
        endeavor to develop consensus by seeking common grounds 
        while putting aside differences.

   Win-win cooperation is the goal for China-ASEAN relations.

   People's support is the driving force behind China-ASEAN 
        relations, in part because cooperation helps reduce 
        poverty, narrow [the] development gap, speed up growth 
        and delivers a better life.\242\
---------------------------------------------------------------------------
    \242\ Chinese Premier Wen Jiabao's speech at the China-ASEAN 
summit, Join Hands to Create A Better Future for China-A SEAN 
Relations, October 30, 2006.


    In 2006 Ong Keng Yong, Secretary General of ASEAN, 
---------------------------------------------------------------------------
described growing ASEAN-China economic ties this way:

          ASEAN views China as a close neighbor and an important 
        Dialogue Partner with tremendous potential to offer. With its 
        rapid economic growth and a population of about 1.3 billion 
        people, China is a huge consumer of ASEAN products and also a 
        source of future FDI to the region. In addition, ASEAN is 
        benefiting from the large number Chinese tourists visiting the 
        region and vice-versa.\243\
---------------------------------------------------------------------------
    \243\ ``ASEAN-China Relations: Harmony and Development,'' by Ong 
Keng Yong, Secretary General of ASEAN, at a Commemorative Symposium to 
Mark the 15th Anniversary of China's Dialogue with ASEAN, December 8, 
2006.

U.S. Efforts to Bolster Trade With ASEAN

    In October 2002, the Bush Administration launched the 
Enterprise for ASEAN Initiative (EAI), with a stated goal of 
seeking closer economic ties with ASEAN countries, including 
the possibility of bilateral free trade agreements with 
countries that are committed to economic reforms and openness. 
A potential FTA partner would need to be a member of the World 
Trade Organization (WTO) and have concluded a Trade and 
Investment Framework Agreement (TIFA) with the United States, a 
forum designed to resolve major trade and investment disputes. 
The United States has signed TIFA agreements with Brunei, 
Cambodia, Indonesia, Malaysia, the Philippines, Singapore, 
Thailand, and Vietnam. It has an FTA with Singapore (effective 
2004) and is the process of negotiating one with Malaysia. FTA 
talks with Thailand were suspended in 2006, due to the 
political crisis there and public opposition. On August 25, 
2007 USTR Susan Schwab signed a TIFA agreement with ASEAN. In 
September 2007, President Bush met with seven ASEAN leaders 
attending the APEC summit in Australia and announced that the 
U.S. would nominate an ambassador to ASEAN.

                              FOREIGN AID

    China's foreign aid has had a growing, tangible impact in 
many countries in Southeast Asia, although it is difficult to 
quantify, due to a lack of data and to the unique 
characteristics of Chinese assistance. In comparison to major 
bilateral donors in the region, China provides relatively 
little official development assistance (ODA) and lacks a formal 
system fordetermining development goals and allocating 
aid.\244\ The PRC administers a wider range of economic 
assistance that includes non-development aid and low-interest 
loans, as well as trade and investment agreements. According to 
some analysts, when these kinds of assistance are added, China 
becomes one of the largest bilateral aid donors in Southeast 
Asia.
---------------------------------------------------------------------------
    \244\ The United States differs from other major aid donors in 
Southeast Asia such as Japan, European countries, and Australia, in 
that it provides not only ODA but also considerable security and 
military assistance, particularly to Indonesia and the Philippines.
---------------------------------------------------------------------------
    Furthermore, because China offers assistance without the 
conditions that other donors frequently place on aid (i.e. 
democratic reform, market opening, and environmental 
protections), it often garners appreciation disproportionate to 
the size of its aid, and thus has a large impact on recipient 
governments.\245\ China's policy of ``non-interference in 
domestic affairs'' often wins friends not only among Southeast 
Asian governments but also by many peoples in the region 
because it is regarded as respectful of their countries' 
sovereignty.
---------------------------------------------------------------------------
    \245\ China's conditions on aid are often international rather than 
domestic--requiring aid recipients to support the ``one-China'' 
principle regarding Taiwan and China's agenda in the United Nations.
---------------------------------------------------------------------------
    Although PRC assistance reportedly is often not carried out 
as pledged, such aid, announced at lavish receptions with 
toasts to the recipient countries, often carries great symbolic 
value.\246\ Many PRC aid projects, such as government 
buildings, infrastructure, and energy facilities, often funded 
by loans from the China Import-Export Bank and built by Chinese 
companies, are high profile efforts that primarily benefit 
capital cities or the governments in power. Many foreign aid 
experts, non-governmental organizations (NGOs), and local 
groups have criticized Chinese aid for failing to promote 
democracy, widespread sustainable development, and 
environmental conservation.
---------------------------------------------------------------------------
    \246\ Jane Perlez, ``China Competes with West in Aid to its 
Neighbors,'' The New York Times, September 18, 2006.
---------------------------------------------------------------------------
    China has taken some tentative steps toward greater 
transparency in its foreign aid process and coordination with 
other providers of assistance while continuing to eschew the 
label of major ODA donor. China reportedly is gradually 
developing an official aid structure and considering creating a 
unified aid agency. In 2007, the PRC participated in the 
``Pacific Core Partners Meeting'' which included discussions 
among ten countries and several multilateral organizations with 
an interest in reaching a consensus on goals for development 
aid in the South Pacific. During the same year, China for the 
first time provided aid to Cambodia through an international 
pledging process.

Aid to the Least Developed Countries in the Region

    Many reports of PRC aid in the region focus on Burma, 
Cambodia, and Laos, the poorest countries in Southeast Asia and 
ones that have had relatively unfriendly relations with the 
United States. China is considered the ``primary economic 
patron'' of these countries and provides an ``implicit security 
guarantee.'' \247\ China also provides considerable assistance 
to Vietnam, although its influence upon its former adversary 
appears limited compared to other countries. The United States 
has a major aid presence in Cambodia and Vietnam. \248\ 
However, according to data of official development assistance, 
which does not include China, Japan is the largest bilateral 
aid donor among these countries.
---------------------------------------------------------------------------
    \247\ Catherin E. Dalpino, ``Consequences of a Growing China,'' 
Statement before the Senate Committee on Foreign Relations Subcommittee 
on East Asian and Pacific Affairs, June 7, 2005; Heritage Foundation 
program, ``Southeast Asia's Forgotten Tier: Burma, Cambodia and Laos,'' 
July 26, 2007.
    \248\ In FY2008, the United States is to provide development, 
economic, and security assistance worth an estimated $56 million and 
$102 million to Cambodia and Vietnam, respectively. Most U.S. 
assistance to Vietnam funds HIV/AIDS programs. For further information, 
see CRS Report RL31362, U.S. Foreign Aid to East and South Asia: 
Selected Recipients, by Thomas Lum.
---------------------------------------------------------------------------
    Many observers fear that China's unconditional and non-
transparent aid efforts and growing economic integration in 
Southeast Asia negate efforts by western nations to promote 
political and economic reform, reduce corruption, and protect 
the environment in mainland Southeast Asia. Others counter 
that, on balance, Chinese aid promotes development in Southeast 
Asia and that it does not exclude other countries' aid programs 
and objectives. Furthermore, in many cases, China reportedly 
takes on aid projects that other donor countries have avoided 
due to difficulty or hardship. In recent years, China has 
financed many infrastructure and energy-related projects in 
Burma, Cambodia, and Laos that rely upon Chinese materials and 
technical expertise as well as labor. Often these projects help 
China access raw materials and oil. There are some indications 
that Chinese aid in this part of the region is diversifying, 
including support to counter-trafficking in persons and 
counter-narcotics efforts, programs involving Chinese youth 
volunteers (Laos), elections (Cambodia), and historical 
preservation (Cambodia).\249\
---------------------------------------------------------------------------
    \249\ ``China ranks No. 2 in Aiding Cambodia's Town, Sub-district 
Elections,'' BBC Monitoring Asia Pacific, October 12, 2006.

    Burma.--According to some reports, China has been the 
largest source of economic assistance to Burma, including $1.4 
billion to $2 billion in weaponry to the ruling junta since 
1988 and pledges of nearly $5 billion in loans, plants and 
equipment, investment in mineral exploration, hydro power and 
oil and gas production, and agricultural projects.\250\ China 
has helped the Burmese to build roads, railroads, airfields, 
and ports. Following the imposition of U.S. trade sanctions 
against Burma in 2003, China reportedly announced a loan to 
Burma of $200 million. In 2006, China promised another $200 
million loan, although some experts say that such funds were 
never actually provided.\251\ U.S. aid to Burma (an estimated 
$12 million in 2007), is restricted primarily to humanitarian, 
health, education, and democracy programs for Burmese migrants 
and refugees living along the Burma-Thailand border. In terms 
of official development assistance, Japan reportedly is the 
largest bilateral donor to Burma, providing a yearly average of 
$26 million (2004-05).\252\
---------------------------------------------------------------------------
    \250\ Jeffrey York, ``The Junta's Enablers,'' International News, 
October 6, 2007; David Steinberg, ``Burma: Feel-Good U.S. Sanctions 
Wrongheaded,'' Yale Global Online, May 19, 2004; [http://
www.narinjara.com/Reports/BReport.ASP].
    \251\ Testimony of Jared Genser, ``China's Role in the World: The 
China-Burma Relationship,'' U.S. Economic and Security Review 
Commission, August 3, 2006.
    \252\ Organization for Economic Cooperation and Development (OECD). 
See: [http://www.oecd.org/home/].

    Cambodia.--Japan, the United States, France, Australia, and 
Germany are the largest bilateral sources of ODA to Cambodia. 
Foreign aid to Cambodia is coordinated through the Consultative 
Group (CG) for Cambodia, a consortium of international 
financial organizations and donor countries under the auspices 
of the World Bank. Since 1996, the CG has met annually to 
extend aid packages averaging $500 million per year.\253\ China 
provides relatively little development assistance but may be 
one of the largest sources of aid when including loans and 
support for public works, infrastructure, and hydro-power 
projects in the kingdom. In 2006, PRC Prime Minister Wen Jiabao 
pledged $600 million in aid and loans to Cambodia.
---------------------------------------------------------------------------
    \253\ Kyodo News, June 21, 2002.
---------------------------------------------------------------------------
    In 2007, for the first time, China offered aid through the 
Consultative Group's pledging process. The CG pledged $689 
million in assistance to Cambodia, including $91.5 million from 
China.\254\ For the 2007 09 period, China pledged $236 million 
in unspecified aid compared to Japan's $337 million and the 
EU's $215 million.\255\ Cambodia is a relatively large 
recipient of U.S. assistance. The United States provided 
approximately $55 million annually in 2006-07 for health care, 
HIV/AIDS programs, basic education, civil society, de-mining, 
counter-terrorism efforts, and other activities, mostly through 
non-governmental organizations (NGOs) in Cambodia.
---------------------------------------------------------------------------
    \254\ Ker Munthit, ``Donor's Pledge $689 million in Aid for 
Cambodia,'' Associated Press Newswires, June 20, 2007.
    \255\ Economist Intelligence Unit, Country Report: Cambodia, 
September 2007.

    Laos.--Laos receives approximately $250 million in foreign 
aid per year (20% of GDP), including loans from the Asian 
Development Bank (ADB) and the World Bank worth $80 million and 
$40 million, respectively.\256\ According to one report, in 
2001-02, China was the second biggest aid donor to Laos.\257\ 
The top sources of official development assistance to Laos, on 
an average annual basis (2004-05), are Japan ($65 million), 
France ($21 million), Sweden ($19 million), Germany ($15 
million), and Australia ($12 million).\258\ Since the late 
1990s, China has provided Laos with critical grants, low-
interest loans, high profile development projects, technical 
assistance, and foreign investment. Development and other forms 
of aid include transportation infrastructure, hydro power 
projects worth $178 million, youth volunteers engaged in 
medical and educational programs, and agricultural training. In 
2006, Chinese President Hu Jintao visited Vientiane and offered 
$45 million in economic and technical cooperation and debt 
forgiveness. The United States is a relatively small aid donor, 
providing an average annual total of approximately $4.5 million 
between 2005 and 2007.
---------------------------------------------------------------------------
    \256\ Asia & Pacific Review World of Information, July 30, 2007.
    \257\ Joshua Kurlantzick, ``China's Charm: Implications of Chinese 
Soft Power,'' Carnegie Endowment Policy Brief no. 47 (June 2006). This 
measurement of PRC aid likely includes loans. By contrast, U.S. foreign 
assistance, with the exception of food aid, is predominantly grant-
based.
    \258\ OECD data.

    Vietnam.--According to some reports, China may be the 
second largest source of foreign aid to Vietnam (including 
grants and loans). In 2005, the PRC reportedly offered nearly 
$200 million in grants and loans.\259\ In 2006, Beijing 
provided loans to Vietnam for railways, hydro-power 
development, and ship building facilities. Japan and France are 
the largest donors of ODA to Vietnam, providing an annual 
average of $670 million and $116 million, respectively (2004 
05).\260\ According to some experts, compared to Burma, 
Cambodia, and Laos, China's influence in Vietnam is relatively 
limited. In December 2006, Beijing halted aid to Vietnam in 
response to the Vietnamese government's formal invitation to 
Taiwan, a major investor in the country, to attend the APEC 
November 2006 summit in Hanoi.\261\
---------------------------------------------------------------------------
    \259\ ``Vietnam to Borrow Nearly 200 Mln U.S. Dollars from China: 
Report,'' People's Daily Online [http://english.people.com.cn], October 
30, 2005.
    \260\ OECD data.
    \261\ Roger Mitton, ``Beijing Refuses Aid to Hanoi after Rebuff 
over Taiwan,'' Straits Times, December 22, 2006.
---------------------------------------------------------------------------

China's Aid to the More Developed Southeast Asian Countries

    China also has provided significant aid to the large and 
more developed countries in the region, such as Thailand, 
Indonesia and the Philippines. However, these countries also 
have extensive security, economic, and aid ties with the United 
States. Since 2001, the United States has dramatically 
increased development, security, and military assistance to 
Indonesia and the Philippines as part of the global war on 
terror. Furthermore, Japan likely far surpasses both the United 
States and China in foreign aid to these countries, 
particularly Thailand. China has few reported aid projects in 
Thailand. However, after the United States government imposed 
sanctions on military and security-related assistance to 
Thailand worth approximately $29 million following the 
September 2006 military coup, China reportedly offered $49 
million to Thailand in military aid and training.\262\
---------------------------------------------------------------------------
    \262\ Alan Dawson, ``A `Win-Win' Situation for Beijing, 
Washington,'' Bangkok Post, February 21, 2007; ``Current Thai-China 
Ties Seen as `More Resilient and Adaptable' than U.S. Ties,'' BBC 
Monitoring Asia Pacific, February 12, 2007.

    Indonesia.--According to the Organization for Economic 
Cooperation and Development (OECD), the largest bilateral 
donors to Indonesia, on an average annual basis (2004-05), are 
Japan ($963 million), Germany ($191 million), the United States 
($163 million), Australia ($145 million), and the Netherlands 
($128 million). Between 2002 and2007, annual U.S. assistance to 
Indonesia totaled about $136 million.\263\ According to one 
expert, in 2002, China's aid to Indonesia was roughly twice 
that of the United States.\264\ In 2005, PRC President Hu 
Jintao and Indonesian President Susilo Bambang Yudhoyono signed 
a declaration proclaiming a ``strategic partnership'' that was 
accompanied by a promise of preferential loans worth $300 
million. Some foreign aid experts criticized China's relatively 
limited offers of disaster relief following the 2004 Indian 
Ocean earthquake and tsunami. The PRC pledged $63 million to 
Indonesia compared to Taiwan's $50 million and the United 
States' $405 million.
---------------------------------------------------------------------------
    \263\ United States Agency for International Development (USAID).
    \264\ Kurlantzick, ``China's Charm,'' op. cit.

    The Philippines.--The top five bilateral ODA donors to the 
Philippines, on an average annual basis, in 2004-05 were Japan 
($706 million), the United States ($114 million), Germany ($60 
million), Australia ($38 million), and the Netherlands ($20 
million).\265\ In 2006, the United States extended $115 million 
in development, security, and military assistance to the 
Philippines. According other sources, the PRC has become a 
major source of financing for development projects in the 
Philippines, and in 2003, China's aid to the Philippines, 
including loans reportedly was roughly three times U.S. 
assistance.\266\ In January 2007, PRC Premier Wen Jiabao and 
Philippines President Gloria Macapagal-Arroyo signed 20 
economic agreements, including a contract for a Chinese company 
to build and renovate railroads, investment in agriculture, and 
loans for rural development.\267\
---------------------------------------------------------------------------
    \265\ OECD data.
    \266\ ``China Loans to RP to Hit $2 Billion in 3 Years ,'' Manila 
Standard, February 6, 2007; Kurlantzic, ``China's Charm,'' op. cit.
    \267\ ``Philippines, China Sign 20 Agreements to Boost 
Trade,''Xinhua Financial Network, January 16, 2007.
---------------------------------------------------------------------------

                        U.S. POLICY IMPLICATIONS

Trends, Effects, and Implications for the United States

    According to some analysts, China's rising influence has 
coincided with a period of episodic and inconsistent U.S. 
attention toward Southeast Asia, or even a developing power 
vacuum, during the past decade.\268\ Since September 11th, 
2001, the United States government has become somewhat more 
diplomatically engaged in the region and has increased foreign 
aid funding, but with a focus largely limited to counter-
terrorism. The perception of U.S. inattentiveness to the region 
has been reinforced by recent U.S. decisions. In 2007, 
Secretary of State Condoleezza Rice bypassed the annual ASEAN 
Regional Forum (ARF) gathering, and instead traveled to the 
Middle East, while President Bush postponed the U.S.-ASEAN 
summit, set for Singapore in September, and left the APEC 
summit a day early reportedly because of commitments related to 
the Iraq war, renewing ``concerns about the U.S. commitment to 
the region.'' \269\
---------------------------------------------------------------------------
    \268\ Robert G. Sutter, China's Rise in Asia: Promises and Perils 
(New York: Rowman and Littlefield, 2005).
    \269\ Sheldon Simon, ``U.S. Southeast Asia Relations,'' Comparative 
Connections, October, 2007; Ralph Cossa and Brad Glosserman, ``Regional 
Overview,'' Comparative Connections, October, 2007.
---------------------------------------------------------------------------
    Despite a possible decrease in relative influence, however, 
the United States continues to exert both hard and soft power 
in Southeast Asia. In terms of soft power, for example, the 
United States maintains multi-faceted foreign aid programs with 
clear objectives and large development and humanitarian 
components. The United States was also a major contributor to 
countries hit by the 2004 Indian Ocean tsunami, which affected 
several Southeast Asian countries. The United States remains 
ASEAN's 2nd largest trading partner (China ranks 5th) and its 
4th largest source of foreign direct investment (China ranks 
10th), and has sought free trade agreements with several 
countries in the region.
    While there is a general agreement that China's tactics 
have changed to a more accommodating posture with an emphasis 
on soft power, there is less certainty regarding its 
implications and whether China's goals have changed 
accordingly. According to one view, China is pursuing a zero 
sum game where expansion of its influence is, or will be, at 
the expense of the United States. Joshua Kurlantzick writes 
that ``China may want to shift influence away from the United 
States to create its own sphere of influence, a kind of Chinese 
Monroe Doctrine for Southeast Asia [where] countries would 
subordinate their interests to China's, and would think twice 
about supporting the United States.''\270\
---------------------------------------------------------------------------
    \270\ Joshua Kurlantzick, ``China's Charm Offensive in Southeast 
Asia,'' Current History, September 2006.
---------------------------------------------------------------------------
    By contrast, some analysts argue that, on balance, China's 
growing economic influence of the past decade has been 
beneficial to the region and not detrimental to U.S. interests. 
Regarding China's goals, some observers contend that China's 
most pressing concerns, at least in the medium term, are likely 
to be domestic (focusing on economic growth and social 
stability) and that Beijing favors a stable periphery and 
appreciates the dominant U.S. role in helping to maintain 
regional security. These observers maintain that regional 
stability serves as a foundation for Southeast Asian and 
Chinese economic development. Further, they hold that China may 
seek to isolate Taiwan and to increase its influence in the 
region, but only to forestall the possible ``containment'' of 
China rather than to replace the United States.\271\
---------------------------------------------------------------------------
    \271\ See: Percival, op. cit.; Richard W. Hu ``China and East Asian 
Community-Building: Implications & Challenges Ahead,'' The Brookings 
Institution, presentation on October 2, 2007; Robert G. Sutter, China's 
Rise in Asia, op. cit.
---------------------------------------------------------------------------
    Another view suggests that regardless of China's intentions 
in Southeast Asia, the PRC's capabilities often are 
exaggerated, its soft power is limited, tensions in its 
relationships in the region remain, and its friendships are 
transient. In some instances, national governments welcomed PRC 
aid and cooperation while citizens outside the government 
opposed them. In 2007, as concerns rose throughout many parts 
of the world regarding the safety of Chinese products, 
officials in Indonesia, Malaysia, and the Philippines 
reportedly complained that the PRC government was pressuring 
them not to raise the issue, even when such imported goods were 
found to be dangerous. When they banned the sale of unsafe 
items from China, the PRC government reportedly threatened and/
or imposed retaliatory actions, causing consternation among 
many Southeast Asian leaders.\272\ In March 2008, some 
Philippine lawmakers and policy analysts sharply criticized the 
Arroyo Administration's agreement with China in 2004 to 
undertake a joint seismic study in the disputed South China Sea 
for the purpose of possible oil and gas exploration. They 
argued that the agreement weakened Philippine territorial 
claims and undermined the role of ASEAN in mediating joint 
activities in the area.\273\
---------------------------------------------------------------------------
    \272\ Ariana Eunjung Cha, ``Asians Say Trade Complaints Bring out 
the Bully in China,'' Washington Post, September 5, 2007.
    \273\ Barry Waine, ``Manila's Bungle in the South China Sea,'' Far 
Eastern Economic Review, Jan/Feb 2008; ``In Brief,'' South China 
Morning Post, March 14, 2008; Mark J. Valencia, ``The Philippines' 
`Spratly Bungle': Blessing in Disguise?'' Policy Forum Online, March 
18, 2008.
---------------------------------------------------------------------------
    Even some of the main beneficiaries of China's largesse in 
Southeast Asia remain wary of the PRC or seek to dampen its 
growing influence in the region. For example, many Cambodians, 
mindful of the PRC's former support of the Khmer Rouge, 
reportedly feel antagonistic towards China. The Lao government 
maintains close ties with both China and Vietnam, while the 
Vietnamese government reportedly has quietly encouraged Lao 
leaders to cultivate better ties with the United States as a 
means to counteract Chinese power. Vietnamese citizens held 
anti-China demonstrations, likely with the encouragement of the 
Vietnamese government, in Hanoi and Ho Chi Minh City in 
December 2007, to protest Chinese military exercises simulating 
invasions of the disputed Spratly Islands in the South China 
Sea and the creation of a new PRC administrative unit that 
would include the islands.

          Figure 21. Southeast Asia and Surrounding Countries



                                     

                              ----------                              


                        Sub-Saharan Africa\274\

---------------------------------------------------------------------------
    \274\ Prepared by Nicolas Cook, Specialist in African Affairs, 
Foreign Affairs, Defense, and Trade Division.
---------------------------------------------------------------------------

                                OVERVIEW

Historical Background

    China's economic growth priorities also have redefined its 
relations with sub-Saharan Africa (``Africa'' hereafter). From 
the formative period of Sino-Africa relations in the 1950s 
until the late 1970s, China offered African countries 
politically-motivated aid. Much of it consisted of 
infrastructure projects, such as railroads--notably the famed 
Tanzania-Zambia (TAZARA) railway of the early 1970s--stadiums, 
government buildings, and party headquarters, as well as 
sectoral economic development projects. Until the late 1970s, 
when China began a broad internal economic modernization 
process, its engagement in Africa was primarily defined by a 
shared interest in colonial liberation, developed vs. 
developing policy goals, Cold War rivalries, and other 
political factors. China's subsequent rapid economic growth in 
the early to mid-1980s prompted it to gradually redefine its 
international relations policy goals. Increasingly, it began to 
pursue bilateral ties defined by pragmatic economic and trade-
related ends, rather than political or ideological ones. In 
Africa, China continued to support aid projects, but its 
engagement on the continent was generally less prominent than 
previously. China increasingly began to use cost-benefit 
analyses in making decisions about these projects, and sought 
to ensure that they included contributions from recipient 
countries or were pursued as joint ventures.
    Renewed Chinese interest in and ties with Africa were 
sparked in the late 1980s and 1990s by China's rapidly 
expanding domestic economy and export-focused manufacturing 
sectors, which spurred trade ties with other countries, 
including many in commodity-rich Africa. In Africa, as 
elsewhere, China also advocated international norms of 
political neutrality and state sovereignty, particularly with 
respect to non-interference with respect to countries' internal 
affairs. This was notably the case following a rise in 
international criticism of China prompted by the 1989 Tiananmen 
Square crackdown on democracy activists. As in earlier decades, 
Africa played an important role in China's strategy for 
achieving its policy goals within and through the U.N. system 
and in other international forums, where Africa's many member 
governments represented an important potential block of allied 
votes.\275\ Many of China's goals during this period were 
amenable to African governments, which wanted to boost their 
own trade and tap often under-exploited natural resource 
reserves. Many also firmly espoused principles of non-
interference in the affairs of sovereign states, in some cases 
because, like China, they were targets of foreign criticism 
regarding undemocratic governance and poor human rights 
records. China's outreach took various forms. In Africa, it 
increasingly centered on development investments and business 
deals, often underpinned by PRC soft loans or development aid. 
As remains the case today, PRC assistance was typically 
conditioned on the recipient country's cutting of ties with 
Taiwan.
---------------------------------------------------------------------------
    \275\ African votes had proved crucial in bringing about the 
transfer of the Chinese seat on the U.N. Security Council from Taiwan 
to the People's Republic of China (PRC) in 1971.
---------------------------------------------------------------------------

Current Motives and Objectives

    The types of economic and political cooperation that 
defined the Chinese-Africa relationship in the 1990s remain, 
albeit with some variation, keystones of China's relations with 
Africa. China's voracious appetite for resources, especially 
energy resources, is widely viewed as the primary motive for 
its expanding outreach to Africa, though Africa's current 
economic growth and future potential as a consumer market also 
spurs such ties. China's current political efforts to foster 
allies among Africa's many states are motivated by its 
perennial and increasingly successful efforts to 
internationally isolate Taiwan\276\ and efforts to curry 
African votes within U.N. and other international forums in 
order to achieve diverse policy goals.\277\ Chinese diplomatic 
engagement also seeks to ensure that future Chinese investment 
and trade remains welcome in Africa. Due to its political 
history and economic success, the PRC views itself as a 
developing country leader and natural African ally in the 
search for a ``new, just and rational economic order,'' 
providing African states with a development model with which 
they can identify, should they see fit. China strongly insists 
on the right of African countries autonomously to define their 
own developmental paths, based on their unique circumstances 
and needs, as it does for itself.
---------------------------------------------------------------------------
    \276\ As of January 2008, only four African countries, Burkina 
Faso, Sao Tome and Principe, Gambia, and Swaziland maintained 
diplomatic ties with Taiwan.
    \277\ Including a desire to counter putative U.S. hegemonic 
aspirations; minimize Taiwanese participation in international forums, 
and to shape international policy-making decisions that may affect 
countries, such as Sudan, in which Chinese interests may be at stake.
---------------------------------------------------------------------------

Challenges

    While the breadth, diversity, and extent of Chinese 
involvement in Africa are rapidly growing, these developments 
are also causing Sino-African relations to become increasingly 
complex and more politically challenging to manage. China's 
African undertakings are increasingly affected by diverse 
international events, politics, and policy trends, with origins 
both in Africa and extrinsic to it. Examples include 
international responses to the conflict in Darfur, Sudan; 
western support for universal good governance and fiscal 
transparency; and globalized economic competition. Ongoing 
changes on the continent, such as the growth of an increasingly 
diverse media, an increase in electronic communications, and 
the development of a large non-governmental sector also pose 
challenges to Chinese officials and firms active in Africa--as 
well as their African counterparts. Sino-African ties take 
place in a dynamic socio-political environment; they are no 
longer pursued only within the staid confines of official 
state-to-state relations and cannot be controlled as tightly as 
in the past. They are becoming an object of popular African 
political consideration and civic debate, in part because 
African and foreign media and civil society groups are 
increasingly voicing their views over both the positive and 
negative implications for Africa of these ties.
    Concern among some observers is growing over the 
prospective impact that China's efforts to gain and ensure 
access to African energy and mined primary commodities might 
have on global energy markets. Similarly, rising Chinese 
investment in Africa suggests to some analysts that China 
presents a competitive threat to developed country investment 
on the continent. Many African and foreign observers are also 
concerned about growing PRC political clout in Africa. Sino-
African bilateral investment agreements are the focus of 
criticism because they often fuse business, political, aid, and 
sometimes military considerations. These allow China to offer 
integrated ``package'' deals. These may be more attractive to 
African governments than those offered by western country 
governments, which exercise much less control over their 
private sectors than the PRC, and often operationally separate 
their aid, military, and diplomatic initiatives. In some cases, 
according to critics, PRC-African deals contain provisions that 
may potentially conflict with international human rights, 
transparency, or environmental norms, or promote economic 
activities that do little to develop--or compete with--the 
African private sector.\278\
---------------------------------------------------------------------------
    \278\ Examples commonly cited include PRC sales of military 
materiel to governments accused of human rights abuses by Western 
governments, e.g., Sudan and Zimbabwe; the use of imported Chinese 
labor to build infrastructure in African countries where manual labor 
is plentiful and jobless rates are high; the rapid growth of small-
scale Chinese retail sectors that compete with indigenous African 
entrepreneurs; the unsustainable harvest of African timber stocks and 
fisheries by or for sale to Chinese firms; and financing of 
construction and extractive industry projects that reportedly will have 
adverse environmental impacts.
---------------------------------------------------------------------------
    Other analysts, however, point to potential benefits to 
Africa resulting from China's involvement on the continent. 
Most often cited are rising levels of Chinese investment in 
Africa, particularly in infrastructure, increases in African 
earnings due to rises in African exports to China, and Chinese 
fulfillment of unmet African consumer demands. China is also 
seen as providing African countries with a new source of 
business credit and finance, and as spurring global commercial 
interest in African resources and markets. China may also allow 
African countries to maintain more autonomy in international 
politics by lessening their dependence on official aid and 
credit from Western donor countries. China may also represent 
an alternative locus of global power with which African 
countries can ally in order to balance their ties with the 
West, particularly when faced with political conditionalities 
demanded by Western countries in return for aid, credit, or 
political cooperation.

                     CHINA'S CURRENT AFRICA POLICY

    China's political-economic bilateral goals and relations in 
Africa are defined in a formal document released in early 2006, 
entitled China's African Policy.\279\ It outlines the PRC goal 
of creating ``a new type of strategic partnership with Africa'' 
consisting of diverse types of cooperation grounded in long-
standing ``guiding'' Chinese foreign policy principles.\280\ It 
explicitly conditions official PRC relations with African 
states on their adherence to the PRC's ``one-China principle,'' 
calling this the ``political foundation'' of such bilateral 
relations.
---------------------------------------------------------------------------
    \279\ Online text: [http://www.fmprc.gov.cn/eng/zxxx/t230615.htm].
    \280\ These arise from a series of policy frameworks laid out by 
successive PRC premiers, beginning in the 1950s. They include mutual 
respect for territorial integrity and sovereignty; non-aggression and 
non-interference in other countries' internal affairs; equality and 
mutual benefit; and peaceful coexistence.
---------------------------------------------------------------------------
    The document seeks to increase high-level reciprocal 
leadership visits and diverse lower level bilateral learning 
exchanges and economic and technical cooperation committees, 
and pledges PRC cooperation with Africa in international 
forums. In the economic sphere, the policy seeks to boost Sino-
African trade, including through potential increased PRCduty-
free treatment for some African exports, the negotiation of 
Free Trade Agreements, and the provision of export credits for 
PRC investment and business activities in Africa--notably in 
infrastructure and utilities contracting. It seeks enhanced 
dispute settlement, investment protection, and double taxation 
accords, and seeks enhanced joint business promotion efforts. 
It pledges PRC support for African development, especially in 
agriculture, raises the possibility of PRC debt cancellation 
for some African countries, and urges increased international 
official debt relief and ``economic assistance . . . with no 
political strings attached'' for Africa. It also seeks 
increased science and technology, cultural, and environmental 
cooperation, and offers increased Chinese human resource 
training and PRC scholarships for Africans, among other 
education support efforts.\281\ China also pledges increased 
health sector assistance, including through the dispatch of PRC 
medical teams to Africa (a long-standing, largely successful 
PRC ``health diplomacy'' tradition). Media, civil service, and 
disaster relief training are also planned.
---------------------------------------------------------------------------
    \281\ PRC officials assert that China has reportedly provided as 
many as 18,000 government scholarships to students from 50 African 
countries since 1949 and has sent more than 700 teachers to 33 African 
countries. See Liu Guijin, ``China's Role in Meeting Africa's 
Developmental Needs,'' [conference speech], China in Africa in the 21st 
Century, October 16, 2006.
---------------------------------------------------------------------------

PRC Outreach to Africa

    Among the most notable of China's efforts to foster closer 
ties with Africa, both bilaterally and at the continental 
level, is the Forum on China-Africa Cooperation (FOCAC). FOCAC 
is a comprehensive effort initiated by China to build mutually 
beneficial economic development, trade cooperation and 
political relations with Africa and is rooted in principles of 
``South-South Cooperation.'' It was formed in October 2000 in 
Beijing during a summit of PRC and 45 African country leaders. 
Founding participants agreed to meet triennially, alternatively 
in China and Africa. Subsequent FOCAC activities provided the 
basis for many of the key goals outlined in China's African 
Policy. The second FOCAC gathering in Ethiopia in 2003, held 
alongside a Sino-African business conference, adopted an 
``Action Plan.'' In it, China promised to cooperate with Africa 
in the areas of infrastructure development, healthcare, human 
resource development, and PRC private sector investment in 
African agriculture.

 
----------------------------------------------------------------------------------------------------------------
                                      Chinese Pledges Under FOCAC
----------------------------------------------------------------------------------------------------------------
    At each FOCAC gathering, the PRC has made a concerted effort demonstrate the concrete benefits
 that Africa is deriving from China as a result of the forum's creation. The PRC spurred African
 participation in the first gathering by pledging forgiveness of about 10 billion yuan (about
 $1.21 billion) to poor indebted African countries and to expand PRC foreign aid to Africa. At the
 2003 FOCAC meeting in Ethiopia, China also announced that it had exceeded its year 2000 debt
 forgiveness pledge by offering 10.5 billion yuan (about $1.27 billion) to 31 African countries.
 To boost Chinese investment in Africa, forum participants agreed to simplify regulatory
 requirements for Chinese firms operating in Africa, and China urged African adoption of the
 various pro-business accords later outlined in its African Policy. China also agreed to negotiate
 zero-tariff treatment for some African countries' exports to China; pledged to support accession
 to the WTO of African applicants; and announced substantial progress in meeting its earlier debt
 forgiveness offer. China also offered to train 10,000 African personnel over three years,
 beginning in 2004, and to increase scholarships for African exchange students in China. A total
 of 20 contracts worth $460 million were reportedly signed by 17 PRC firms in such areas as
 engineering construction, pharmaceuticals, industrial chemicals, and textiles.
    At a meeting just prior to the November 2006 FOCAC Summit in Beijing, China's ambassador to
 South Africa outlined a series of substantive FOCAC achievements. He stated that China had
 completely fulfilled its 31-country debt relief pledge, made in 2000; provided tariff exemptions
 covering 191 items for 30 African countries since 2005; approved 17 African countries as PRC
 tourist destinations; trained almost 10,000 African personnel from 2004-2006; and deployed a PRC
 youth volunteer team to work in Ethiopia, the first of several planned for various African
 countries. He also stated that China would prioritize African policy goals and interests in the
 U.N. Security Council. At the summit, PRC officials also set a goal of more than doubling Sino-
 African trade, from $40 billion in 2005 to $100 billion by 2010. Fourteen agreements between 11
 Chinese enterprises and African governments and firms worth $1.9 billion were signed at the
 Summit, and participants produced a near-term road map for cooperation, the Beijing Action Plan
 (2007-2009). The deals centered on infrastructure, communications, technology and equipment,
 energy and resources development, finance and insurance, including expressways in Nigeria, a
 telecom network in Ghana, and an aluminum smelter in Egypt. A new China-Africa Joint Chamber of
 Commerce and Industry was also formed. The plan largely mirrors but also expands on aims of the
 2003 Action Plan, in part as reflected by President Hu's pledges. Notable was an increased focus
 on support for the AU; increased bilateral cooperation in the areas of judicial and rule of law
 strengthening, agriculture, and environmental protection; a Chinese endeavor to urge Chinese
 banks to establish branches throughout Africa; and PRC offers of media training assistance for
 African journalists. The two sides also agreed to further technical cooperation in diverse areas.
----------------------------------------------------------------------------------------------------------------

    The most recent FOCAC Summit took place in Beijing in 
November 2006, and was held alongside related ministerial and 
business conferences. It reportedly was the largest 
international event ever held in China, drawing China's top 
leaders as well as 48 high-level African government 
delegations, including 41 heads of state. At the summit, PRC 
President Hu Jintao announced eight major new PRC efforts to 
strengthen the Sino-African ``strategic partnership'' under 
FOCAC, pledging that China would:


   Double its level of year 2006 assistance to Africa by 2009.

   Provide $3 billion in ``preferential loans'' and $2 billion 
        in ``preferential buyers' credits'' targeted at poor 
        African countries by 2009.

   Establish a China-Africa Development Fund worth an eventual 
        $5 billion to encourage Chinese companies to invest in 
        Africa and provide support to them.

   Build a headquarters for the African Union in aid of 
        African unity and integration.

   Cancel all the interest-free government loans due at the 
        end of 2005 owed by those poor African countries 
        maintaining diplomatic relations with China.

   Increase the number of items subject to Chinese duty-free 
        treatment exported by poor Africa countries with 
        diplomatic ties with China from 190 to 440.

   Create three to five trade and economic cooperation zones 
        in Africa by 2009.

   By 2009 deploy 100 top Chinese agricultural experts to 
        Africa; establish 10 agricultural technology centers; 
        build 30 hospitals; provide about $40 million in grants 
        for anti-malaria drugs, prevention, and construction of 
        model treatment centers; deploy 300 PRC Peace Corps-
        like volunteers to Africa; build 100 rural schools in 
        Africa; train 15,000 African professionals; and double 
        the number of PRC government scholarships for African 
        students from 2,000 per year to 4,000 per year.

Vehicles for Diplomacy

    The wide-ranging exchange and cooperation activities laid 
out under the FOCAC framework and in China's African Policy are 
implemented by an extensive network of PRC diplomats in Africa. 
China maintains embassies in every African country (apart from 
Somalia) with which it has diplomatic ties, i.e., 43 of 48 Sub-
Saharan countries.\282\ It also maintains commercial counselor 
offices in 40 of these countries and seven consulates-general 
in five of them. These posts are manned by teams of diplomats 
who are reportedly increasingly conversant in local languages. 
Another mechanism for its bilateral engagement are frequent, 
high level leadership exchange visits, notably including 
regular annual trips to Africa by top PRC authorities. In 2006 
and 2007, such trips included visits by President Hu Jintao, 
who made similar visits in recent prior years, and other key 
leaders such as Premier Wen Jiabao. China's foreign ministers, 
including the current incumbent, Yang Jiechi, have undertaken 
annual visits to Africa since 1990.\290\ Such leadership visits 
are used to build personal leadership ties and cement bilateral 
relations in diverse areas. Visiting PRC political VIPs, 
typically accompanied by large delegations including business 
representatives, sign major agreements that underpin and 
structure such ties and announce or witness the signing of 
large commercial commodity or construction contract deals, many 
financed by PRC state agencies at preferential rates. African 
heads of state, also often accompanied by large retinues of 
political, trade, and business leaders, make frequent 
reciprocal visits. A range of lower-level exchange visits also 
occur, and often include training for African officials such as 
senior and mid-level diplomats, economic officials, business 
professionals, and other key decision-makers and policy 
implementers. Such training programs began in the mid-1990s. 
There are also exchanges between legislative bodies, the PRC 
Communist Party and African political parties, and local 
governments, to which China periodically provides in-kind 
material assistance.\284\ Most of these activities are PRC-
funded.
---------------------------------------------------------------------------
    \282\ There is no embassy in Somalia due to insecurity associated 
with the on-going armed conflict there.
    \283\ He Wenpin, ``Moving Forward with the Time: the Evolution of 
China's African Policy,'' China-Africa Links Workshop, Center on 
China's Transnational Relations, Hong Kong University of Science and 
Technology (CCTR/HKUST), November 2006; testimony of Michael 
Ranneberger, then-State Department Deputy Assistant Secretary for 
African Affairs, before the Subcommittee on Africa, Global Human Rights 
and International Operations of the House International Relations 
Committee on at a July 28, 2005 hearing entitled China's Influence in 
Africa; and Paul Simao, ``China Keen to Strengthen Ties in Africa-
foreign Min,'' Reuters, Jan 7, 2008.
    \284\ ``China to Further Strengthen Press Cooperation with Africa, 
Says Senior CPC Official,'' PRC Ministry of Commerce, September 13, 
2007; and Joshua Eisenman, ``The Communist Party of China's Outreach to 
Political Parties in Sub-Saharan Africa'' [conference paper], 
``Rethinking Africa's `China Factor': Identifying Players, Strategies, 
and Practices,'' University of California, Los Angeles (UCLA), April 
27, 2007.
---------------------------------------------------------------------------

Regional Ties

    China is also reaching out to Africa at the continental 
level. China is a small contributor to the African Development 
Bank (AfDB), but in May 2007 it hosted the bank's annual 
meeting. The event, attended by Premier Wen Jiabao, featured 
various events highlighting PRC investment and development 
relations with Africa and related PRC undertakings, including:


   China's approval of an initial $1 billion capitalization of 
        the China Development Bank (CDB)-administered China-
        Africa Development Fund, which is slated to be expanded 
        to $5 billion in total and is designed to fund PRC firm 
        equity investments and business deals in Africa in the 
        areas of natural resources, infrastructure, 
        agriculture, manufacturing and industrial parks.

   A pledge by China's Export-Import (ExIm) Bank to provide 
        $20 billion in loan funding for diverse projects in 
        Africa from 2007 through 2009.

   China's membership in the West African Development Bank and 
        the CDB's signing of cooperative ``framework 
        agreements'' with the East African Development Bank and 
        the Eastern and Southern African Trade and Development 
        Bank.\285\
---------------------------------------------------------------------------
    \285\ The China Development Bank also reportedly has entered into a 
cooperative agreement with the East African Development Bank to which 
the former has extended a $30 million line of credit. ``East Africa: 
EADB, China Sign $30 Million Credit Line,'' East African Business Week 
(Kampala), October 16, 2006.


    In press interviews made during the meetings, African 
officials praised Sino-African ties, but also cautioned that 
PRC investment in Africa needs more heavily to emphasize 
African development and investment diversity. They also stated 
that PRC bilateral investment and loans must not recreate 
colonial-era export-oriented, extractive, non-developmental 
patterns of trade, and not result in new unsustainable African 
debt.\286\
---------------------------------------------------------------------------
    \286\ Benjamin Morgan, ``AfDB boss hits out at China,'' AFP via 
www.fin24.co.za, May 14, 2007; and ``African Development Bk Affirms 
China's Growing Role,'' Dow Jones Commodities Service, May 17, 2007.
---------------------------------------------------------------------------

African Union

    China has also stepped up diplomatic engagement with the 
African Union (AU), attending key AU summit meetings in 2006 
and 2007. Beijing is an observer with several African sub-
regional economic integration organizations. In May 2007, after 
appointing its first Special Representative on African Affairs 
and Darfur, Liu Guijin, China agreed to finance the 
construction of a $100-$150 million African Union headquarters, 
fulfilling President Hu Jintao's pledge at the 2006 FOCAC 
summit.\287\ The PRC has also provided funding for the AU 
peacekeeping missions in Sudan's Darfur region and in Somalia, 
and occasionally provides limited humanitarian assistance in 
Darfur and elsewhere. China also has expressed rhetorical 
support for the New Partnership for Africa's Development 
(NEPAD), the Africa Union's (AU) continental development plan, 
and supports its aims and objectives.\288\
---------------------------------------------------------------------------
    \287\ Liu, China's former ambassador to South Africa and Zimbabwe, 
respectively, is also the former head of China's Foreign Ministry 
Department of African Affairs.
    \288\ ``Interview: NEPAD secretariat gives China thumbs up for 
investment in Africa,'' Xinhua, March 13, 2007; and U.N. Office of the 
Special Adviser on Africa (OSAA), ``China: Support to NEPAD'' (period 
June 2002-June 2003), N.D., inter alia.
---------------------------------------------------------------------------

Military and Security Issues

    Beijing provides training in China for African military 
officers, technical aid related to its donation or sale of 
military equipment to African countries, and other capacity-
building help for African militaries, although public 
information on the scope and content of such activities is 
lacking. In China's African Policy, the PRC pledged to boost 
such aid, as well as help Africa fight crime by offering 
judicial and police training and cooperation, and by setting up 
a channel for intelligence and information exchange.\289\ 
Military-to-military exchanges underpin ties with a reported 25 
African countries. Only nine of a global total of 107 Chinese 
military attache offices are located in Sub-Saharan Africa, 
however, and no African states have to date participated in 
joint military exercises with the PRC.
---------------------------------------------------------------------------
    \289\ Such assistance targets ``non-traditional security threats,'' 
including terrorism, small arms smuggling, drug trafficking, and 
transnational economic crimes.
---------------------------------------------------------------------------
    China has long sold arms to Africa. In recent years, arms 
deals with Sudan, Nigeria, countries in the Horn of Africa, and 
Zimbabwe have drawn attention. In some cases, such deals have 
included shipments of military aircraft. From 2003-2006, China 
is estimated to have been the third largest exporter of 
conventional and small arms to Africa, after Germany and 
Russia, having provided about 15.4% ($500 million) of a $3.3 
billion total in global sales to the region during that period. 
It was the second largest supplier from 1999-2002, when it is 
estimated to have provided 13.2% ($500 million) of $3.8 billion 
in global flows to Africa of such arms.\290\ Experts point out 
that PRC military vehicles and equipment tend to be simple and 
rugged, making them attractive in African markets, and China is 
believed to be a key supplier of a variety of inexpensive small 
arms in Africa, notably including generic versions of the AK-47 
and related assault rifles and police equipment.
---------------------------------------------------------------------------
    \290\ Apart from small arms, PRC conventional arms exports to 
Africa consisted mostly of artillery, armored personnel vehicles, minor 
naval surface vessels, supersonic combat aircraft, and other aircraft. 
See CRS Report RL34187, Conventional Arms Transfers to Developing 
Nations, 1999-2006, by Richard F. Grimmett.
---------------------------------------------------------------------------
    International peacekeeping is an emerging area of Chinese 
engagement in Africa.\291\ Chinese military or police personnel 
have been seconded to all but one of the current U.N. 
peacekeeping operations (PKO) in Africa, including large 
contingents in the U.N. peacekeeping operations in Liberia, the 
Democratic Republic of the Congo, and southern Sudan. China has 
reportedly begun to deploy a unit to the emergent U.N. PKO in 
Darfur, Sudan. Most PRC PKO contingents are made up of military 
observers or functional units (e.g., engineering, transport and 
logistics, and medical groups). China has also donated 
equipment for peacekeeping purposes to the Economic Community 
of West African States and has aided the African Union Mission 
in Sudan.\292\
---------------------------------------------------------------------------
    \291\ Drew Thompson, ``Beijing's Participation in UN Peacekeeping 
Operations,'' China Brief, Jamestown Foundation, (5: 11), May 10, 2005.
    \292\ Philippe D. Rogers, ``China and United Nations Peacekeeping 
Operations in Africa,'' Naval War College Review, (60:2), Spring 2007
---------------------------------------------------------------------------

                PRC ``AID'' AND TRADE FINANCE IN AFRICA

    There are numerous signs that PRC official development 
assistance (ODA) and finance for bilateral trade and PRC 
foreign direct investment in Africa (FDI) are growing 
rapidly.\293\ Independently verifiable, accurate data on the 
absolute amount or rates of increase of these resource flows 
are lacking, however, and estimates of such flows vary widely. 
In part, this is because PRC assistance to Africa consists of a 
mix of grants, interest-free loans bilateral state loans, and 
concessional low-interest loans that are often partially 
commercial in character.\294\ While grants and interest-free 
loans may be classifiable as ODA, other resource flows that the 
PRC views as bilateral assistance may have characteristics of 
both conventional ODA and for-profit business finance. As a 
result, many analysts contend that it is difficult to 
differentiate between PRC ODA to Africa and Chinese Africa-
related business credit, especially given that the latter may 
benefit both Chinese firms, in many cases substantially, and 
African countries. Even internal PRC state accounting systems 
are reportedly largely unable to distinguish between these 
various types of resource flows.
---------------------------------------------------------------------------
    \293\ ODA is conventionally defined as official (government) 
grants, technical co-operation (in-kind training or education and 
advisory or consultative services for recipient countries), or loans to 
countries primarily intended to promote economic development and 
welfare in the recipient country, exclusive of all military purposes 
and payments to individuals. Under Organization for Economic Co-
operation and Development (OECD) the definition, it must be offered on 
a grant (i.e., gratis) or concessional loans containing a grant element 
of at least 25%. See OECD Development Assistance Committee (DAC), DAC's 
Glossary.
    \294\ In OECD terminology, ``official sector'' transactions and 
bilateral financial flows that are not categorizable as ODA or 
``Official Aid'' because they are not primarily development-focused or 
contain a grant element of less than 25% are known as ``Other Official 
Flows.'' See DAC's Glossary and DA C Statistical Reporting Directives 
http://www.oecd.org/dataoecd/36/32/31723929.htm and Chinese Aid in 
Africa [Deborah Brautigam].ppt and http://english.eximbank.gov.cn
---------------------------------------------------------------------------
    State subsidization of many of the partially privatized, 
for-profit PRC state-owned enterprises (SOEs) that pursue 
business deals in Africa also makes it difficult to assess the 
nature and value of such projects, which are in many cases tied 
to official PRC bilateral loans to African countries. The fact 
that many of the African partners to these deals are themselves 
for-profit parastatal firms also makes it difficult to 
characterize Chinese ``assistance'' that may flow to them. 
Because of the mixed public-private nature of these deals, 
Chinese ``assistance'' to Africa does not necessarily support 
the general socio-economic development goals and public goods 
that would define it as ODA, but it is also often not purely 
commercial or profit-driven. Furthermore, while China is 
increasing its grant-based development aid to Africa, much of 
its loan-based aid is ``tied,'' i.e., recipient countries must 
agree to use the loans to buy or accept goods, services, or 
credit from China. The bulk ($10 billion) of initiatives for 
Africa announced by President Hu in 2006 are tied.\295\
---------------------------------------------------------------------------
    \295\ The commitments that he announced consist of ``preferential 
loans,'' ``preferential buyers' credits,'' and a ``China-Africa 
Development Fund'' created to ``to encourage Chinese companies to 
invest in Africa and provide support to them.'' ``Address by Hu Jintao 
at the Opening Ceremony of the Beijing Summit of the Forum on China-
Africa Cooperation,'' Beijing, November 4, 2006; Jamil Anderlini, 
``China insists on `tied aid' in Africa,'' Financial Times, June 25, 
2007; and ``Companies have ``central role'' in growth of China-Africa 
economic relations,'' Macauhub.com, September 3, 2007, inter alia. It 
is important to note that tied loan-based aid was long a common feature 
of U.S. and European aid to Africa. In recent years, however, many 
Western donor governments, with some exceptions, have increasingly or 
already largely provide assistance to Africa in the form of grants.
---------------------------------------------------------------------------

PRC Aid: Criticisms and Chinese Responses

    China's merger of aid and trade, and its tendency to 
portray PRC commercial and soft loan projects as ``assistance'' 
to Africa have been widely criticized on the basis that PRC aid 
to Africa is primarily driven by self-interest, and not the 
``mutual win-win'' cooperation that China asserts defines its 
relations with Africa. Critics worry that China's ``no strings 
attached'' aid offers may undermine political goals that have 
increasingly become an integral part of Western foreign aid 
strategies. These include conditions that, in return for aid or 
loans, recipients comply with various international norms 
relating to good governance, the rule of law, transparency, 
anti-corruption measures, environmental standards, and human 
rights. Critics also fear that China's increasing provision of 
new loans to Africa, even at low concessionary rates, may both 
undermine western donor governments' recent large national debt 
write-offs in Africa and saddle poor countries with new 
indebtedness.
    To address criticisms of its foreign aid system and to 
better administer and coordinate increasing levels and types of 
``assistance'' to Africa, China is gradually developing an 
official aid structure.\296\ A single, functionally specialized 
PRC aid agency, like those of Western donors, is reportedly 
under consideration. China is also more carefully defining what 
it labels as ``development assistance'' in public in order to 
ensure policy coherence (e.g., to assert that its aid is 
unconditional yet tie it to PRC commercial contracts) and to 
allow for better comparisons with Western aid. It is also 
scaling up its in-kind grant aid (e.g., goods, services, and 
technical assistance). Apart from its growing debt cancellation 
to Africa (a type of grant), however, PRC grant aid is believed 
to represent a small portion of what PRC officials describe as 
``assistance'' to Africa. The bulk of Chinese assistance 
continues to flow though trade promotion mechanisms.
---------------------------------------------------------------------------
    \296\ Deborah Brautigam, China's Foreign Aid in Africa: What Do We 
Know?, Conference on China in Africa: Geopolitical and Geoeconomic 
Considerations, September 16, 2007 (Revised) and Joshua Kurlantzick, 
``Beijing's Safari: China's Move into Africa and Its Implications for 
Aid, Development, and Governance,'' Policy Outlook, Carnegie Endowment 
China Program, November 2006. This section also draws from Bates Gill 
and James Reilly, ``The Tenuous Hold of China Inc. in Africa,'' The 
Washington Quarterly, 30:3, Summer 2007; V. Maurice Gountin, ``China's 
Assistance to Africa, A Stone Bridge of Sino-African Relations,'' 
China-Africa Links Workshop, CCTR/HKUST, November 2006; Kenneth King, 
``Aid within the Wider China-Africa Partnership: A view from the 
Beijing Summit,'' China-Africa Links Workshop, CCTR/HKUST, November 
2006; and Michelle Chan-Fishel, Time to Go Green: Environmental 
Responsibility in the Chinese Banking Sector, Banktrac, May 2007, inter 
alia.

    Structure.--Much PRC ``assistance'' in Africa is controlled 
by the state-owned Export-Import (ExIm) Bank of China, 
established in 1994 as the lead vehicle for official PRC 
bilateral concessional loans, export credits, and international 
loan guarantees. The Aid to Foreign Countries Department of the 
Ministry of Commerce (MOC) manages and executes PRC bilateral 
foreign aid policy, budgeting, and project implementation. It 
does this primarily by controlling the bidding and vetting 
processes for soft loan-backed contract projects undertaken by 
PRC firms, which it also loosely regulates and assists in the 
field. Another key entity is the China Development Bank (CDB). 
Founded in 1994 as a ``development-oriented financial 
institution'' under the direct jurisdiction of the State 
Council (the supreme administrative decision-making organ of 
the PRC), the CDB is the funding source of the new China-Africa 
Development Fund. Functional ministries (e.g., Health, 
Education, Agriculture) also deploy technical advisory and 
training teams to Africa under MOC guidance. A variety of other 
finance and export agencies and provincial or urban 
organizations, such as chambers of commerce, and export 
promotion and foreign training entities, also play a role in 
foreign assistance project implementation in Africa. Ministry 
of Foreign Affairs (MOFA) and MOC officials advise top 
policymakers on assistance to Africa, but political and policy 
decisions relating to these activities are reportedly made by 
the State Council in coordination with the Leading Group on 
Foreign Affairs of the Communist Party, and in concordance with 
the economic goals of the State Development and Planning 
Commission (SDPC).
    PRC assistance project proposals for Africa are reportedly 
suggested by PRC ambassadors to Africa, sometimes at the 
request of African governments, after their submissions have 
been vetted by other MOFA officials. When large or costly 
projects are proposed, the Finance Ministry and/or MOC units 
also play a vetting role. PRC energy policy, including 
strategic PRC energy investments in Africa, is laid out by the 
Office of the National Energy Leading Group, the SDPC, and the 
MOC with advice from China's three key state-owned oil 
companies, which also implement such policy goals.\297\ China 
signed 238 bilateral treaties with foreign countries or 
multilateral entities in 2006 and 158 such treaties in 2005. 
About 30% of these accords were with African countries. Most 
relate to economic and technical cooperation, PRC medical aid, 
or the provision of PRC loans or aid, but an increasing number 
pertain to mutual legal, tax, and diplomatic ties.\298\
---------------------------------------------------------------------------
    \297\ China National Petroleum Corporation (CNPC), the China 
Petroleum and Chemical Corporation (Sinopec), and the China National 
Offshore Oil Corporation (CNOOC).
    \298\ See Ministry of Commerce (MOC), ``The Main Bilateral Treaty 
List China and Foreign Countries Signed in 2006'' and'' The Main 
Bilateral Treaty List China and Foreign Countries Signed in 2005''; and 
Hong Yonghon, ``Legal Cooperation of China and African States: Past, 
Present and Future,'' China-Africa Links Workshop, CCTR/HKUST, November 
2006.
---------------------------------------------------------------------------
    Country aid programs are reportedly designed and managed on 
a country-by-country basis, with attention to the key generic 
goals of PRC policy objectives in Africa, but largely in the 
absence of cohesive, unitary, or pan-regional program plans or 
uniform guidelines. One common pattern, however, is that 
project aid is often offered as part of or contingent upon the 
sealing of larger, integrated bilateral commercial, military, 
and/or political package agreements. This somewhat piecemeal 
approach may change in response to efforts to bring increased 
coherence to PRC aid strategies. At present, however, it 
appears to be driven by the substantial challenge of 
coordinating the actions of China's large, operationally 
autonomous and sometimes rival ministries and by China's stated 
policy of not interfering in countries' internal affairs. PRC 
policy makers also claim that a country-by-country approach 
allows China to avoid imposing a monolithic Chinese model of 
socio-economic development on individual African countries. 
Chinese officials reportedly claim that PRC bilateral 
cooperation assistance packages are crafted to respond to the 
needs and priorities of each recipient country, even though 
patterns of official PRC resource flows to Africa suggest that 
PRC assistance mainly targets countries that are important to 
the PRC as trade partners or political allies. Another 
indication that China's assistance strategy is defined 
primarily by its own economic and political priorities is that 
Chinese assistance programs generally do not reflect the design 
paradigms and program patterns of other countries' assistance. 
Many other donors allocate assistance in response to objective 
country-level socio-economic characteristics, such as rates of 
poverty or disease, and coordinate aid among themselves to 
ensure that various development challenges are met and 
duplication of effort is avoided. By contrast, with a few 
exceptions, China does not coordinate its aid in Africa with 
other donor governments, although it is beginning to consult 
with them in an apparent effort to draw on their experience. 
China is also offering some aid to Africa through the IMF and 
World Bank.
    China's nascent rationalization of its foreign aid system 
is reportedly being prompted by two key factors, among others. 
One is the dramatic increase in aid and loan outflows, and the 
need to better coordinate them for policy purposes. Another is 
potential tension between PRC foreign policy goals and the 
incentive structure and actions of the state agencies and 
numerous Chinese firms that execute PRC policy in Africa. These 
firms, many of them SOEs, along with the agencies that 
partially own or control a reported 88% of them, operate on the 
basis of profit and business efficiency in geographically 
dispersed operations. As a result, their activities in some 
instances may be at odds with policy goals or harmonious 
bilateral relations. Chinese firms' labor practices are a prime 
example of business-related activities that may conflict with 
PRC foreign policy goals.\299\ Others include direct 
competition with African firms; environmental abuses by timber, 
fishery, and other firms; smuggling of endangered species 
parts; and occasional allegations that contracted outputs, such 
as roads or other infrastructure, are of poor quality. To 
address such problems and due to criticisms of China's own 
environmental record, the CDB and ExIm have both reportedly 
created environmental impact loan policies, although little 
information about how these policies are implemented is 
available. Similarly, in 2006 the MOC adopted measures to 
ensure Chinese corporate and contractual responsibility. It set 
up an office to deal with the grievances of Chinese workers in 
Africa and issued guidelines requiring PRC businesses in Africa 
to hire locally when possible, respect African laws and 
customs, and abide by international safety standards. In late 
2006, the MOC also barred Chinese firms' transfer of officially 
authorized PRC foreign assistance contracts to firms not 
specifically authorized to execute them, as well as 
unauthorized subcontracting of foreign aid projects.\300\
---------------------------------------------------------------------------
    \299\ For instance, use of low-wage, unskilled Chinese labor in 
Africa in place of African labor; poor adherence to safety standards or 
and other working conditions; and low pay offerings, which have 
generated public worker protests by Chinese and African workers in 
Africa. See Kenneth King, Aid within . . . .; and Gill and Reilly, 
``The Tenuous Hold . . . ,'' op cit. inter alia.
    \300\ Gill and Reilly, ``The Tenuous Hold . . . ,''. op cit. and 
Bates Gill, Chin-hao Huang, and J. S. Morrison, ``Assessing China's 
Growing Influence in Africa,'' China Security, (3:3), Summer 2007.
---------------------------------------------------------------------------
    The MOC's ability to enforce compliance with these 
regulations may be limited, however, because it lacks both a 
field presence in Africa and the authority to order that MOFA 
officers in Africa carry out enforcement actions on MOC's 
behalf. MOFA and MOC officials may also find it difficult to 
challenge politically powerful transgressing firms. It also 
does not exercise direct authority over state-owned Chinese 
firms in Africa, which make up a significant portion of more 
than 800 Chinese firms, both state-owned or and wholly or 
partially privatized, that reportedly operate in Africa. That 
role is held by the State-owned Assets Supervision and 
Administration Commission (SASAC), an administrative coequal of 
MOC. It officially ``owns'' these firms and is motivated by 
profit-making goals in Africa that may conflict with MOC and 
MOFA policy objectives there. Moreover, the MOC itself may lack 
the motivation to vigorously implement its regulatory writ 
because it may conflict with its core role as a promoter of 
Chinese investment and business interests.\301\
---------------------------------------------------------------------------
    \301\ In addition, some PRC policy makers may wish to rely on 
market mechanisms rather than regulation to prompt responsible PRC 
corporate behavior overseas. In January 2007, a top PRC legislator 
warned that ``irresponsible practices'' by some Chinese firms overseas 
have reduced their foreign growth and profits and that firms employing 
such practices ``will be kicked out of the market.'' See ``China's 
Senior Legislator Criticizes Companies for Shirking Social 
Responsibility,'' Xinhua, January 29, 2007.
---------------------------------------------------------------------------
    In some cases, however, political and economic goals may 
dovetail. State subsidies of Chinese firms, for instance, may 
provide them with the incentive to pursue projects in Africa 
that may not be individually economically efficient, but which 
accomplish long-term strategic PRC investment and commodity 
access goals. For instance, state-backed PRC firms have 
reportedly paid above-market prices for shares in African state 
energy firms to guarantee access to oil supplies, or have 
entered unprofitable bids on projects in order to pave the way 
for future contracts and closer bilateral ties. China's very 
large foreign exchange reserves fund such activities. There are 
also tax incentives for out-bound Chinese investment.
    All of these activities in Africa are part of a quasi-
mercantilist PRC policy known as ``going out'' or ``going 
global,'' in which strategic, government-mediated foreign 
investment by large state-supported PRC firms is undertaken to 
boost China's long-term growth.\302\ Its quasi-mercantilist 
nature arises from the fact that the PRC actively promotes the 
interests of SOEs and seeks to accumulate reserves of resources 
and hard currency to fund national growth and wealth creation--
rather than by accessing such resources exclusively through 
markets or letting such firms prosper or fail purely as a 
result of market forces. It is also quasi-mercantilist in that 
China's activities often involve the use of a loose barter 
system, in which access to natural resources by SOEs is gained 
in exchange for cheap or no interest loans for the construction 
of infrastructure and other activities.
---------------------------------------------------------------------------
    \302\ Harry Harding, Ian Bremmer, Thomas Stewart, David Lipton, et 
al., ``China Goes Global: Implications for the United States,'' The 
National Interest, September/October 2006; and Margot Schuller and Anke 
Turner, ``Global Ambitions: Chinese Companies Spread Their Wings, Im 
Fokus,'' China Aktuell,  34: 4, 2005.
---------------------------------------------------------------------------

PRC African Aid Levels

    For reasons previously stated, accurate data on specific 
levels of PRC resource flows to Africa are not publicly 
available. Educated guesses as to the total annual level of PRC 
foreign aid, based mostly on a growing body of anecdotal and 
piecemeal published information, range widely; one researcher 
cited a range for the year 2005 of between $970 million and 
$1.5 and $2 billion or higher worldwide, with Africa receiving 
between a third to a half of such totals.\303\ Another source 
reports that all PRC economic support to all of Africa totaled 
$1.8 billion in 2002.\304\ Such estimates generally do not 
break out ODA and non-ODA components. Africanist scholar 
Deborah Brautigam reports that China's foreign aid totaled $1.4 
billion for 2007, up from about $450 million a year a decade 
earlier, and that in the beginning of the present decade, 44% 
of that aid went to Africa. She uses the latter figure to 
estimate China's African aid budget at about $462 million in 
2006 and $616 million in 2007, and notes that President Hu's 
2006 FOCAC pledge to double the PRC's year 2006 level of 
assistance to Africa by 2009 would raise China's grant aid to 
Africa to the level of $1 billion per year.\305\ Total 
outstanding ExIm loans to Africa, both concessional and non-
concessional, in the infrastructure sector alone reportedly 
totaled $12.5 billion as of mid-2006, and have grown rapidly in 
recent years. Of these, a reported 80% went to Angola, Nigeria, 
Mozambique, Sudan, and Zimbabwe, and were heavily weighted 
toward infrastructure construction.\306\ In May 2007, China's 
State Council approved the China Development Bank's (CDB) 
initial $1 billion capitalization of the eventual non-ODA $5 
billion China-Africa Development Fund. As of early 2007, the 
CDB had $1 billion in current loans outstanding in Africa and 
was considering funding up to 30 projects in Africa, mostly in 
agriculture, manufacture, and infrastructure, worth about $3 
billion.\307\
---------------------------------------------------------------------------
    \303\ Carol Lancaster, ``The Chinese Aid System,'' Center for 
Global Development, June 2007.
    \304\ Harry G. Broadman, et al.,  Africa's Silk Road: China and 
India's New Economic Frontier, World Bank, 2007.
    \305\ Brautigam , China's Foreign Aid.
    \306\ Broadman, et al., Africa's Silk Road, op cit. By September 
2006, 79% of a total of 259 PRC ExIm projects in 36 African countries 
supported infrastructure development projects. See Linden J. Ellis, 
``China Exim Bank in Africa: Opportunities for Strengthening 
Environmental Standards for Hydropower in Sudan,'' March 22, 2007 
(China Environment Forum/Woodrow Wilson Center presentation summary.)
    \307\ See ``China approves China-Africa Development Fund,'' Xinhua, 
May 14, 2007 and ``China-Africa Economic and Trade Cooperation Takes An 
Important Step Forward,'' CDB, June 26, 2007.
---------------------------------------------------------------------------
    As previously discussed, Chinese ODA to Africa currently 
cannot be compared directly to ODA flows to Africa from other 
donors. However, an indicative sense of the overall magnitude 
of all types of PRC bilateral cooperation funding for Africa 
compared to ODA flows to Africa from other donors may be 
useful. In contrast to the Chinese resource flows described 
above, the OECD has estimated the 2005-2006 average annual 
amount of gross bilateral ODA going to Africa from the leading 
OECD donors as follows: United States, $4.939 billion; United 
Kingdom, $4.669 billion; European Community, $3.464 billion; 
and Japan, $2.567.\308\
---------------------------------------------------------------------------
    \308\ Richard Manning/OECD DAC, ``Development Co-operation Report 
2007,'' OECD Journal on Development (9:1), 2008.
---------------------------------------------------------------------------

                   CHINA-AFRICA TRADE AND INVESTMENT

    In addition to political motives, most researchers 
attribute China's state, public-private, and commercial 
business dealings with Africa and other developing regions to 
China's growing appetite for raw materials and global markets. 
In general, China has run a trade deficit with Africa that, 
while slowly declining, is much larger than the very minor 
trade deficit that it ran with the sub-continent at the 
beginning of the present decade. In 2001, the value of its 
imports from Africa were roughly 2.3% more than those of its 
exports. By 2004, this proportion had risen to 46.5%, but has 
since declined somewhat; it stood at 38.4% in 2006. In addition 
to the goods trade, Africa is seen by China as a small but 
growing construction and technical projects contracting market, 
and as a small but rapidly growing market for Chinese 
manufactured goods. There are some potential structural 
limitations on prospects for Africa's relative gains from trade 
ties with China, since the current balance of trade is strongly 
weighted in China's favor: China imports from Africa raw, non-
value-added commodities, while it exports finished, value-added 
goods to Africa. Officially, China also welcomes African 
investment in China, but African investment in China is small. 
It represents about 1.5% of total global foreign investment in 
China in recent years, and is limited to a few countries. In 
2004 and 2005, Mauritius and South Africa accounted for an 
aggregate of 82% and 12%, respectively, of all African 
investments in China.\309\
---------------------------------------------------------------------------
    \309\ The next largest African investor in China was Nigeria, with 
a 1.3% share during the same period. All other countries' individual 
investments in China each amounted to 0.6% or far less of African 
investments in China in 2004 and 2005. CRS calculations based on data 
in ``Chapter 18 Foreign Trade and Economic Cooperation,'' Table 18-16 
Actual Foreign Investment by Countries or Regions, China Statistical 
Yearbook 2006, [http://www.stats.gov.cn/tj sj/ndsj/2006/indexeh.htm].
---------------------------------------------------------------------------
    From 2001-2006, the absolute value of U.S. goods trade with 
Africa, at $71 billion, was greater than that of Sino-African 
trade, but Chinese-African trade grew at a much faster rate 
than U.S.-African trade. China's total trade with sub-Saharan 
Africa rose from $8.92 billion to $45.35 billion in that 
period, an increase of 409%, as compared to a 152% rise in 
total U.S.-African trade during the same period. Chinese-
African trade also grew at a rate 166% higher than that of 
total Chinese-world trade (see Table 11).\310\ While some of 
these trade trends may pertain to China's rapidly growing 
export of services and contracting work to Africa, they do not 
reflect the value of trade in services and other intangibles. 
Accurate information on the volume and value of such trade 
flows is limited. One indication of trends in this area is the 
officially reported value of China's ``economic cooperation'' 
with Africa, which reflects almost all Chinese investment in 
Africa. In 2005, such cooperation totaled $4.68 billion, 
comprising $4.53 billion in ``Contracted Projects,'' $136.1 
million in ``Labor Cooperation,'' and $18.6 million in ``Design 
Consultation.'' The latter two categories decreased slightly 
compared to those for 2004, but the amount for Contracted 
Projects increased 61.5% over that in 2004. Net Chinese 
overseas ``domestic investor'' (private capital) flows to all 
of Africa, including North Africa, were relatively minor in 
comparison. They reportedly totaled $317.42 million in 2004 
(5.8% of global investments by Chinese domestic investors) and 
$391.7 million in 2005 (3.2% of global investments), while the 
cumulative, multi-year total of such annual investments was 
$1.60 billion (2.8% of global investments), with most 
concentrated in Sub-Saharan Africa.
---------------------------------------------------------------------------
    \310\ Except where noted otherwise, the import and export value and 
quantity data in this section are from China Customs and the U.S. 
Commerce Department, as compiled in the World Trade Atlas online 
database. Calculations of relative changes or proportions of such data 
were made by CRS.
---------------------------------------------------------------------------
    Chinese sectoral investments in Africa are concentrated in 
the energy sector, in which trade-related finance is tied to 
another major area of investment, infrastructure construction 
(mostly public and commercial buildings, water delivery 
networks, roads, railroads, electrical power systems, and 
dams). Turnkey manufacturing plant installation and operations, 
commercial technical service contracting, banking, and telecoms 
are other key areas of investment. Projects in all of these 
areas are often very large, in the multi-million to multi-
billion dollar-sized range. Africa is also an increasing market 
for Chinese consumer and capital goods exports, which are 
retailed both by African traders and a growing number of 
Chinese retailers.

  Table 11. Total U.S. and Chinese Goods Trade With Africa by Value and Share in Global Perspective: 2001-2006
                                                  ($ billions)
----------------------------------------------------------------------------------------------------------------
                                                China Trade                             U.S. Trade
                                 -------------------------------------------------------------------------------
                                                          Africa's Share
              Year                                          of Chinese                            Africa's Share
                                    World:      Africa:     World Trade     World:      Africa:    of U.S. World
                                     Value       Value       (percent)       Value       Value         Trade
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
2001............................       510.0         8.9            1.8      1,407.4        28.2            2.0
2002............................       620.9        10.1            1.6      1,487.0        23.9            1.6
2003............................       851.6        15.4            1.8      1,695.6        32.5            1.9
2004............................     1,154.5        24.5            2.1      2,063.4        44.3            2.2
2005............................     1,422.6        32.7            2.3      2,435.8        60.7            2.5
2006............................     1,761.1        45.4            2.6      2,823.3        71.2            2.5
================================================================================================================
Totals & Share Average by            6,320.6       136.9            2.0     11,912.4       260.9            2.1
 Percent, 2001-2006.............
----------------------------------------------------------------------------------------------------------------
Percentile Change, 2001-2006....       245.3       408.4           47.2        100.6       152.2           25.7
----------------------------------------------------------------------------------------------------------------
Source: U.S. Dept. of Commerce and China Customs data as compiled in the World Trade Atlas Internet Edition as
  of November/October 2007 and CRS calculations using these data.

Imports

    From 2001 to 2006, Chinese imports from Africa rose by 
485%, from $4.5 billion to $26.31 billion, compared to a 178% 
jump--from $21.29 billion to $59.09 billion--in U.S. imports 
from Africa during that period (see Table 12). The share of 
China's imports from Africa as a proportion of its total global 
imports grew from 1.9% in 2001 to 3.3% in 2006, a pattern 
closely mirrored in the share of U.S. imports from Africa as a 
proportion of all U.S. imports; these grew from 1.9% to 3.2%.
    From 2001 to 2006 Chinese imports from Africa were 
primarily made up of raw commodities. In rank order, these 
were: crude oil; iron ore; raw timber; raw cotton; rough 
diamonds; re-imports of previously exported goods (e.g., 
repaired, used, and re-shipped goods); and metals.\311\ 
Together with bulk stainless steel supplies and raw tobacco, 
these products made up just under 90% of the value of all 
Chinese imports from Africa during that period. Chinese demand 
for such commodities is expected to grow, in some cases 
exponentially. Chinese demand for agricultural products is also 
growing. If it continues, this trend may be particularly 
beneficial to the large number of African economies that rely 
heavily on the farm sector, especially those that lack oil or 
mining resources or industries.\312\
---------------------------------------------------------------------------
    \311\ Unprocessed and--to a lesser extent--semi-processed metals 
are key components of Africa's exports to China. Chief among these are 
iron ore, platinum, manganese, cobalt, aluminum, nickel, copper, 
niobium, tantalum, vanadium, zirconium, chromium, and lead.
    \312\ Deutsche Bank Research, ``China's Commodity Hunger: 
Implications for Africa and Latin America,'' Current Issues, June 13, 
2006.
---------------------------------------------------------------------------
    In addition to being highly concentrated in form, China's 
imports from Africa are also highly concentrated 
geographically. From 2001 to 2006, about 89% of its African 
imports came from seven countries, whose share of such imports 
were primarily made up of oil except in the case of South 
Africa; its exports to China were primarily made up of 
metals.\313\
---------------------------------------------------------------------------
    \313\ The seven countries were: Angola (which contributed 33.8% of 
the value-based share of Chinese imports from Africa), South Africa 
(19.0%), Sudan (12.6%), Republic of Congo (10.2%), Equatorial Guinea 
(8.1%), Gabon (3.0%), and Nigeria (2.2%).

    Table 12. U.S. and Chinese Goods Imports From Africa by Value and Share in Global Perspective: 2001-2006
                                                  ($ billions)
----------------------------------------------------------------------------------------------------------------
                                                PRC Imports                            U.S. Imports
                                 -------------------------------------------------------------------------------
                                                          Africa's Share
              Year                                        of All Chinese                          Africa's Share
                                    World:      Africa:       Imports       World:      Africa:     of All U.S.
                                     Value       Value       (percent)       Value       Value        Imports
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
2001............................       243.6         4.5            1.9      1,141.0        21.3            1.9
2002............................       295.3         5.1            1.7      1,161.4        17.9            1.5
2003............................       413.1         7.9            1.9      1,257.1        25.6            2.0
2004............................       560.8        14.5            2.6      1,469.7        35.9            2.4
2005............................       660.2        19.3            2.9      1,673.5        50.4            3.0
2006............................       791.8        26.3            3.3      1,853.9        59.1            3.2
================================================================================================================
Percentile Change, 2001-2006....       225.1       484.5           79.5         62.5       177.6           70.6
----------------------------------------------------------------------------------------------------------------
Source: U.S. Dept. of Commerce and China Customs data as compiled in the World Trade Atlas Internet Edition as
  of November/October 2007 and CRS calculations using these data.

    All other African countries contributed under 2% of Chinese 
imports from the sub-continent. While oil and metals are likely 
to continue to predominate among Chinese imports from Africa in 
the short to medium-term, diversification across countries may 
grow moderately, as large mining operations come online or 
increase production in countries like Guinea, the Democratic 
Republic of Congo, Sierra Leone, and elsewhere.

Oil

    China is now the world's second largest consumer of oil 
products after the United States, consuming a reported 7.88 
million barrels per day. This level is projected to nearly 
double to 13.4 million barrels per day by 2025.\314\ 
Calculations based upon data from China's General 
Administration of Customs indicate that African countries 
provided about 29% of China's crude oil imports by quantity in 
2006, up from about 22% in 2001. The share rise for U.S. 
imports was comparatively moderate; it increased from 15.5% in 
2001 to 18.1% in 2006 (see Table 13).\315\ The value of Chinese 
oil imports from Africa rose over sevenfold between 2001, when 
it totaled $2.5 billion, and 2006, when it totaled $19.2 
billion. By contrast, U.S. oil imports from Africa rose from 
$13.7 billion in 2001 to $45.1 billion in 2006, a growth rate 
less than half as much as large as that for China (see Table 
14). The rate of growth in Chinese imports of African oil in 
comparison to that of the United States is also growing 
rapidly, even though the absolute value of U.S. oil imports 
from Africa remains substantially larger than that of China.
---------------------------------------------------------------------------
    \314\ Global Insight, Global Petroleum Outlook Forecast Tables 
(Long-Term), January 2005 and Global Petroleum Monthly, September 2007. 
Other projections show a much larger increases in Chinese demand.
    \315\  Import trends as measured by value are similar but differ 
slightly, due to variations in average world prices and changing mixes 
of the types of oil that China imports. Various grades of oil are 
priced differently, due both to their relative scarcity and based on 
their role in refining. General Administration of Customs of China data 
reported by World Trade Atlas.

                  Table 13. African Oil as a Proportion of All Chinese and U.S. Imports of Oil
                                         (Percentage share of quantity)
----------------------------------------------------------------------------------------------------------------
                                             2001        2002        2003        2004        2005        2006
----------------------------------------------------------------------------------------------------------------
China...................................       22.1        22.8        24.0        27.1        27.8        29.1
United States...........................       15.5        12.7        15.3        16.7        18.4        18.1
----------------------------------------------------------------------------------------------------------------
Source: U.S. Dept. of Commerce and China Customs data as compiled in the World Trade Atlas Internet Edition as
  of November/October 2007 and CRS calculations using these data.


                      Table 14. Value of Chinese and U.S. Imports of Crude Oil from Africa
                                                  ($ billions)
----------------------------------------------------------------------------------------------------------------
                                             2001        2002        2003        2004        2005        2006
----------------------------------------------------------------------------------------------------------------
China...................................        2.5         2.9         4.8         9.4        13.3        19.2
United States...........................       13.7        10.9        17.0        25.0        37.8        45.1
----------------------------------------------------------------------------------------------------------------
Source: U.S. Dept. of Commerce and China Customs data as compiled in the World Trade Atlas Internet Edition as
  of November/October 2007 and CRS calculations using these data.


          Table 15. Chinese and U.S. Oil Imports from Africa as a proportion of All Imports from Africa
                                           (Percentage share of value)
----------------------------------------------------------------------------------------------------------------
                                             2001        2002        2003        2004        2005        2006
----------------------------------------------------------------------------------------------------------------
China...................................       56.5        56.8        60.5        65.0        69.0        72.9
United States...........................       64.3        61.0        66.5        69.7        75.1        76.4
----------------------------------------------------------------------------------------------------------------
Source: U.S. Dept. of Commerce and China Customs data as compiled in the World Trade Atlas Internet Edition as
  of November/October 2007 and CRS calculations using these data.

    In 2001, China's imported only 18.6% as much oil by value 
as the United States; by 2006, it was importing 42.5% as much. 
The value of oil as a percentage of the value of all exports 
from Africa has also grown faster for China than for the United 
States (see Table 15 above). Such trends indicate that Africa 
is becoming an increasingly important source of oil for China, 
and suggests that Chinese-U.S. competition for African oil is 
likely to grow.
    From 2001 to 2006 there were sharp increases in Chinese 
imports of crude oil from most of its top African oil 
suppliers. By 2006, the top five Africa oil exporters to China 
were: Angola (China's second largest source of oil globally); 
Congo (6th); Equatorial Guinea (7th); Sudan (8th); and 
Mauritania (22nd).\316\ Angolan export trends are particularly 
notable, as Angola became China's second largest source of 
crude oil in 2004, surpassing Iran, and in 2006 its oil exports 
to China trailed those of Saudi Arabia by a slim 1.8% margin.
---------------------------------------------------------------------------
    \316\ Nigeria, China's fourth African largest source of oil in 
2001, had by 2006 dropped to being its eighth-largest African supplier, 
having been surpassed by Mauritania and Chad, both new oil producers, 
as well as Gabon. Rankings based upon General Administration of Customs 
of China data reported by World Trade Atlas and CRS calculations.
---------------------------------------------------------------------------
    In part to secure future oil supplies from Africa, China 
has invested in a number of oil drilling, refining, pipeline, 
tanker facility, and power generating projects in Africa, 
mainly through wholly or partially government-owned PRC firms. 
While such investments may decrease the number of investment 
opportunities of these types for western energy firms, some 
observers believe that in the short- to medium-term, major 
western oil production firms will maintain a competitive 
technological edge over Chinese firms in the area of deep water 
exploration and production. Such a competitive edge could be 
significant because some of the largest and highest quality 
untapped reserves of crude oil in Africa are believed to lie 
under the deep waters of the Gulf of Guinea. Some experts, 
however, believe that PRC firms could overcome the deepwater 
challenge by contracting for specialized underwater drilling 
services.\317\ In addition, China's control of equity oil is at 
present largely limited to Sudan, though fields to which it 
holds recently acquired equity rights in Angola and several 
other countries are slated to begin production soon.\318\
---------------------------------------------------------------------------
    \317\ Equity oil is defined as that obtained by control of rights 
to a given proportion of output from an oil concession in exchange for 
oil field exploration, development, or extraction services and 
investments, as opposed to trade or purchase-mediated access to oil. 
Glossary, Energy Information Admin. (EIA), Energy Dept. and Glossary of 
Energy Terms, Gardner Energy MacroIndex [both online].
    \318\ Jonathan Holslag, et al, ``Chinese Resources . . . op cit., 
inter alia.
---------------------------------------------------------------------------

Exports

    From 2001-2006, China's total exports to Africa rose by 
nearly 331%, from $4.42 billion to $19.04 billion, compared to 
a much smaller, nearly 75% rise--from $6.94 billion to $12.12 
billion--in U.S. exports to Africa during the same period 
(seeTable 16). The share of China's exports to Africa as a 
proportion of all of its exports grew from 1.7% in 2001 to 2% 
in 2006. The rate of growth of the share of U.S. exports to 
Africa as a portion of all U.S. exports during that period was 
slightly more rapid; these grew from just under 1% to just over 
1% of all U.S. exports.
    In contrast to China's imports from Africa, its top exports 
to the region were diversified, and there was limited overlap 
between its top African export destinations and import sources, 
as well as substantial differences between top African 
exporters' percentage of the Chinese import trade.

                         Table 16. U.S. and Chinese Goods Exports to Africa by Value and Share in Global Perspective: 2001-2006
                                                                      ($ billions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  China Exports                               U.S. Exports
                                                                   -------------------------------------------------------------------------------------
                               Year                                                          China Exports to                           U.S. Exports  to
                                                                      World:      Africa:   Africa as Percent    World:      Africa:   Africa as Percent
                                                                       Value       Value      of All Exports      Value       Value      of All Exports
--------------------------------------------------------------------------------------------------------------------------------------------------------
2001..............................................................       266.4         4.4               1.7        729.1         6.9               1.0
2002..............................................................       325.6         5.0               1.5        693.1         6.0               0.9
2003..............................................................       438.5         7.5               1.7        724.8         6.9               1.0
2004..............................................................       593.7         9.9               1.7        818.8         8.4               1.0
2005..............................................................       762.3        13.4               1.8          906        10.3               1.1
2006..............................................................       969.3        19.0               2.0     1,036.60        12.1               1.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent Change, 2001-2006.........................................       263.9       330.9              18.1         42.2        74.5              23.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: U.S. Dept. of Commerce and China Customs data as compiled in the World Trade Atlas Internet Edition as of November/October 2007 and CRS
  calculations using these data.

    There was also substantial diversity in types of Chinese 
exports to Africa. The largest single export product category, 
woven cotton fabrics, made up 6.3% of China's exports to 
Africa, and the top ten products together made up 26.3% of the 
total export value, but the vast majority of products made up a 
fraction of a percent of export values. In addition to woven 
cotton fabrics, China's top 10 export products to Africa were: 
motorcycles (3.6%), footwear, (3.4%), synthetic fabrics (2.6%), 
batteries, (2.5%), broadcasting equipment (1.8%), telephone 
equipment (1.7%), tires (1.6%), embroidery (1.4%), and mixed 
component fabrics (1.4%). While this product mix predominated 
in the period from 2001 to 2006, in general the mix of Chinese 
exports to Africa vary greatly from year to year.

                 SINO-AFRICAN ENGAGEMENT: IMPLICATIONS

    China's burgeoning economic and political engagement with 
Africa has elicited a range of reactions from African, U.S., 
and other policy makers and analysts. These range from 
enthusiastic or guardedly optimistic responses to growing 
concern over what some perceive to be an actual or potential 
Chinese strategic and economic threat to western or African 
interests. Such concerns primarily relate to the state-centric, 
political-commercial mode of PRC engagement in Africa; to its 
potential negative impacts on U.S. and Western public policy 
goals and engagement in Africa; to the competitive impact of 
increased PRC imports of raw materials from Africa and, to a 
lesser extent, to Chinese competition for current and future 
African market demand; and to the implications for U.S. 
political interests and influence of the PRC's undertakings in 
Africa.\319\
---------------------------------------------------------------------------
    \319\ Chis Alden, ``China in Africa,'' Survival, (47:3), 2005; 
Philippe D. Rogers, ``Dragon with a Heart of Darkness? Countering 
Chinese Influence in Africa,'' Joint Forces Quarterly (47), 2007; Peter 
Brookes and Ji Hye Shin, China's Influence in Africa: Implications for 
the United States, Heritage Foundation, (1916), February 22, 2006; 
Joshua Kurlantzick, ``Beijing's Safari: China's Move into Africa and 
Its Implications for Aid, Development, and Governance,'' Policy 
Outlook, Carnegie Endowment China Program, November 2006; Akwe Amosu, 
``China in Africa: It's (Still) the Governance, Stupid,'' Foreign 
Policy in Focus Discussion Paper, March 9, 2007; and Human Rights 
Watch, ``China-Africa Summit: Focus on Human Rights, Not Just Trade,'' 
November 2, 2006, inter alia.
---------------------------------------------------------------------------

Economic Effects

    Despite concern by some analysts regarding the manner in 
which Sino-African economic relations are pursued, such ties 
are clearly producing benefits for many African economies. Many 
countries are enjoying rapidly rising earnings due to Chinese 
demand for their exports; in the case of Angola, for instance, 
IMF data indicates that bilateral exports to China rose from 
$1.68 billion in 2000 to $9.94 billion in 2006. Similar trends 
are true of multiple other countries. During the same period, 
South Africa's exports rose from $336 million to $2.09 billion, 
while Equatorial Guinea's rose from $238 million to $2.31 
billion in 2006. Chinese involvement in Africa is also leading 
to investment in infrastructure and the financial services, 
manufacturing, consumer retail, various other sectors, and in 
specialized market niches that non-Chinese foreign investors 
have generally long ignored. Agricultural development and other 
technical assistance is also increasing, and African access to 
cheap credit and diverse, inexpensive consumer goods is 
growing. Infrastructure construction is widely seen as one of 
the most positive benefits of PRC investment in Africa, given 
the widespread lack or poor condition of such facilities in 
Africa. Similarly, to the extent that China provides credit to 
Africa without conditions, such resources may help African 
governments to autonomously fulfill their sovereign, self-
defined development goals in the absence of what some view as 
the paternalistic or self-interested imposition of policy 
requirements by Western donor governments.\320\
---------------------------------------------------------------------------
    \320\ Andrew Bounds, ``African States Refuse to Join EU Trade 
Deal,'' Financial Times, December 4, 2007; Ignacio Ramonet, ``Africa 
Says No--and Means it,'' Le Monde Diplomatique, December 31, 2007; 
Thandika Mkandawire and Charles C. Soludo, Our Continent, Our Future: 
African Perspectives on Structural Adjustment, CODESRIA, 1998.
---------------------------------------------------------------------------
    Many analysts, however, also contend that China's 
increasing engagement poses serious challenges for Africa. 
While growth in many of the sectors targeted by PRC finance and 
investment is likely to benefit Africa, gains from investment 
in some areas may be limited. Vertical and horizontal growth in 
Chinese-backed African manufacturing, for instance, may quickly 
hit a ceiling, since Chinese factories in Africa often rely on 
inputs from China and commercial relations with other Chinese 
firms, rather than African ones. Similarly, industries in much 
of Africa are unlikely to easily be able to gain a competitive 
advantage over those of China or other Asian countries, where 
cheap goods and highly-developed factor markets typically 
outperform African manufacturers, and put some out of business. 
Claims that Asian investment in Africa may boost African 
development or provide useful models for growth may be overly 
optimistic.
    Some analysts assert that due to Asian manufacturing 
strength, Africa is unlikely to be able to successfully pursue 
the kind of export growth and diversification process that 
spurred economic growth and development in much of Asia. Some 
also view potential gains from Chinese investment in Africa as 
unlikely to result in the growth of indigenous African 
manufacturing sectors, given that many Chinese loans that fund 
business activities in Africa are directed to PRC firms active 
there, rather than African-owned firms. Such loans, as well as 
other types of preferential treatment, also give many of these 
Chinese firms a competitive advantage over African firms--as 
well as other foreign competitors. As previously noted, 
Africa's relative potential gains from trade ties with China 
may be limited by the fact that China primarily imports raw 
commodities from Africa, while it exports finished, value-added 
goods to Africa.
    This trade pattern, along with frequent PRC investment in 
outward-bound, export-facilitating transportation projects, has 
spurred some critics to label Chinese involvement in Africa 
``neo-colonial.'' Critics allege that such trade and investment 
reproduces the same kinds of extractive, basic commodity 
export-oriented development that was common in colonial times 
in Africa, and which is often seen as having contributed to low 
growth rates and lackluster post-colonial economic development 
in Africa generally. Chinese officials vehemently reject such 
charges, citing the diverse types of complementary ``win-win'' 
political, cultural, and developmental non-trade cooperation 
that they say characterizes Sino-African relations. They also 
compare Europe's history of slave-taking and colonial era 
abuses in Africa to the record of Chinese engagement with the 
continent.\321\
---------------------------------------------------------------------------
    \321\ See Liu Guijin, ``China's Role . . . op cit.; and Craig 
Timberg, ``Hu Defends China's Role in Africa,'' Washington Post, 
February 8, 2007.
---------------------------------------------------------------------------
    China's desire for African commodities could potentially 
provide leverage to African countries regarding the conditions 
that they may impose on Chinese investment, an argument that is 
bolstered by China's insistence that trade with Africa provide 
``win-win'' outcomes for both sides. For instance, African 
countries might require that larger portions of Chinese loans 
be channeled to services or goods purchases from African firms 
or that Sino-African joint business ventures employ Africans in 
managerial and decision-making roles. Investment projects could 
require increased technology transfer components, local 
secondary processing of resources prior to export, or be 
renegotiable following an initial designated period. Similarly, 
large Chinese plants or mining center investment deals might 
require PRC investors to fund more extensive ``corporate 
responsibility'' projects, such as schools or clinics for 
project employees. While a few oil countries, such as Angola 
and Nigeria, appear to be employing such leverage, such demands 
may be difficult to impose for countries that are not rich in 
natural resource commodities, in part due to intra-African 
competition. Such countries may lose out to other African 
countries that offer better terms in exchange for similar types 
of deals with Chinese firms. Similarly, countries may be loathe 
to pay the relative opportunity costs of foregoing very low-
cost PRC financing, given higher interest rates and conditions 
that may accompany other sources of finance, and may thus be 
willing to strike deals with Chinese entities that are not very 
beneficial to the country involved. They may also possess 
social needs so great that even limited PRC business project 
social investments may be perceived as adequate quids pro quo. 
Limited African human and business sectoral capacities, poor 
infrastructure, and small market national sizes may also 
constrain the extent to which local firms can exploit Chinese 
loan shares that are reserved for them or effectively adopt 
Chinese technologies.

Transparency and Governance Issues

    Other concerns expressed by critics of Chinese activities 
in Africa relate to fears that the same kinds of corrupt 
practices and flouting of the rule of law that reportedly are 
common in some sectors of Chinese business and within some 
elements of the state will be brought to Africa by Chinese 
operating there.\322\ They also worry that the lack of 
political conditionality associated with PRC bilateral loans 
will undermine African and Western efforts to implement various 
good governance and anti-corruption initiatives in Africa. 
There is little hard evidence to suggest that corrupt Chinese 
business practices in Africa are systemic or widespread, 
however, although there are periodic reports of PRC illicit 
business practices in Africa.\323\ The rankings of countries 
that have received the bulk of Chinese investment during the 
past half-decade or so, as measured by the monitoring group 
Transparency International, reportedly have not changed much 
during this time period.\324\ Furthermore, some see the PRC as 
supportive of efforts to strengthen the rule of law in Africa, 
since that goal is likely to benefit China in the long run, 
given that many PRC activities in Africa are contract-based and 
subject to potential legal dispute. Indeed, China's African 
Policy states that China is prepared to promote cooperation 
between Chinese and African judicial and law enforcement 
departments and jointly prevent and combat crime.
---------------------------------------------------------------------------
    \322\ For more on rule of law and corruption issues in China, see 
CRS Report RL33416, Social Unrest in China, by Tom Lum; Minxin Pei, 
``Corruption Threatens China's Future, Carnegie Endowment Policy Brief, 
(55), October 2007; and numerous press reports.
    \323\ Examples include illegal labor practices; unsustainable 
exploitation of African timber and fish stocks; trade in endangered 
species; and payments to avoid regulatory compliance requirements.
    \324\ See Andrea Goldstein, Nicolas Pinaud, Helmut Reisen, and 
Xiaobao Chen, ``The Rise of China and India: What's In It for 
Africa?,'' Development Centre Studies, OECD, 2006. While the absence of 
such an increase may be taken as an indication that Chinese firms in 
Africa are not contributing to a rise in corruption in Africa, it does 
not prove such a finding. Corruption levels in some African countries 
may be so high that any Chinese contributions to such trends may be 
marginal. Similarly, in some countries, the level of Chinese foreign 
direct investment may not be large enough to affect national corruption 
trends.
---------------------------------------------------------------------------
    Given data limitations, the effect that Chinese bilateral 
loans may have on transparency in Africa is difficult to 
assess. Loan opaqueness, however, may create incentives for the 
misuse of funds by Chinese or African elites who control access 
to them. It may also help to entrench democratically 
unaccountable, corrupt, or simply non-developmental or poorly 
performing governments, or simply reduce their motivation to 
reform in these areas, by eliminating their readiness to accept 
conditional external finances. Furthermore, to the extent that 
loan proceeds are used for unintended or illicit purposes by 
those who control them, their intended beneficiaries, such as 
the African public and the PRC firms through which loans are 
channeled, will not realize the benefits that they are intended 
to generate.\325\
---------------------------------------------------------------------------
    \325\ At least one major PRC state-backed loan to Angola has 
allegedly been manipulated for political and corrupt ends, although 
Angolan officials reject such reports as false. As a result, projects 
funded by the loan have reportedly been delayed. Past Western credit 
dealings with Angola have also been criticized as lacking transparency. 
Alec Russell, ``Angolan Loan Casts Light on Ties with China,'' 
Financial Times, October 19, 2007; and'' Angola: Chinese 
Firecrackers,'' Africa Confidential, (46:3), February 4, 2005; 
``Finance Ministry Denies Irregularities in China Credit Use,'' Angola 
Press Agency, October 18, 2007; David Pallister, ``Alarm Bells Sound 
over Massive Loans Bankrolling Oil-rich, Graft-tainted Angola,'' The 
Guardian, June 1, 2005; Paul Hare, ``China in Angola: An Emerging 
Energy Partnership,'' China Brief, Jamestown Foundation, (7:18), 
November 8, 2006
---------------------------------------------------------------------------
    To the extent that this occurs, such policies may conflict 
with another key tenet of PRC policy toward Africa: that it 
does not interfere in the internal affairs of states and is 
agnostic with regard to a given government's record on such 
matters as good governance, human rights, or environmental 
protection.\326\ This policy suggests that the PRC does not 
does not view itself as responsible for the actions that its 
bilateral assistance may subsidize. As previously suggested, 
many critics disagree with this claim, even though empirical 
evidence establishing a causative link between Sino-African 
official bilateral engagement and the incremental undermining 
of democratic accountability may not be clear-cut. It may be 
argued, for instance, that undemocratic practices may have been 
likely to occur even in the absence of such engagement.
---------------------------------------------------------------------------
    \326\ The Beijing Declaration of the Forum on China-Africa 
Cooperation (October 12, 2000), states in part that the ``universality 
of human rights and fundamental freedoms should be respected'' but that 
``the politicization of human rights and the imposition of human rights 
conditionalities on economic assistance should be vigorously opposed to 
as they constitute a violation of human rights.'' (Emphasis added.)
---------------------------------------------------------------------------
    What many critics do believe is that China's business, aid, 
credit relations with, and military equipment exports to the 
governments of countries like Zimbabwe and Sudan directly abet 
these states' systematic and well-documented internal human 
rights abuses and authoritarian rule, which are the targets of 
harsh criticism by Western governments and civil society groups 
and are targets of U.S. and European Union sanctions.\327\ In 
African countries where governments face vocal public 
opposition or armed rebellions, Chinese projects that are 
pursued in partnership with such governments are often viewed 
by their political opponents as direct interventions in favor 
of the governments that they oppose. As a result, Chinese 
personnel working on projects in diverse areas in Africa (e.g., 
oil exploration, uranium mining, and telecom installation) have 
repeatedly become targets of political kidnappings and violent 
attacks, some fatal, by armed ethnic rebel movements demanding 
that Chinese mining firms halt their activities in their zones 
of operation.\328\ Chinese engagement in Africa has also 
occasionally become the subject of intense, sometimes 
xenophobic political debate.\329\ Some critics also worry that 
the PRC's political engagement with and training of African 
state officials will result in the transferral to Africa of 
undemocratic, state-centric PRC governance practices, 
potentially leading to such outcomes as a rise in state media 
controls in Africa, resulting from such things as the 
commercial sale of Chinese Internet filtering technologies to 
Zimbabwe and other repressive governments in Africa.
---------------------------------------------------------------------------
    \327\ Danna Harman, ``How China's Support of Sudan Shields a Regime 
Called `Genocidal','' Christian Science Monitor, June 26, 2007; Ronan 
Farrow and Mia Farrow, ``The `Genocide Olympics','' The Wall Street 
Journal, March 28, 2007; and Nat Hentoff, ``Khartoum's enablers in 
Beijing; Chinese Communists and Islamist genocide,'' The Washington 
Times, April 16, 2007; Paul Eckert, ``China's Zimbabwe Embrace Seen as 
Rights Challenge,'' Reuters, July 28, 2005; and ``China and its Chums: 
Mugabe in Beijing,'' The Guardian, July 28, 2005, inter alia.
    \328\ In October and December 2007, for instance, fighters of the 
Sudanese, Darfur-based rebel Justice and Equality Movement (JEM) 
reportedly attacked Chinese-run oil well sites in the states of South 
and West Kordofan. In July 2007, a Chinese executive of a uranium 
mining subsidiary of the China Nuclear Engineering and Construction 
Corporation was kidnapped by Tuareg rebels of the Niger Movement for 
Justice (MNJ) demanding that Chinese mining firms halt their activities 
in the desert region. In April 2007, nine Chinese oil workers were 
killed and seven were kidnapped during an attack by ethnic Somali 
Ogaden National Liberation Front (ONLF) rebels on a Chinese drilling 
exploration site guarded by an Ethiopian military contingent that 
resulted in 74 non-rebel fatalities. The rebels, whose reported target 
was the contingent, has warned foreign firms against working with the 
Ethiopian government. Earlier in 2007, 16 Chinese oil workers were 
kidnapped in the restive Delta Region of Nigeria by ethnic militants 
who made similar demands, as were 12 Chinese telecom workers. Other 
attacks on Chinese nationals, most not overtly political in nature, 
have occurred elsewhere in Africa.
    \329\ This was notably the case in the Zambian election of 2006, 
when the main opposition candidate, a populist, incited his followers 
with vitriolic anti-Chinese rhetoric alleging state favoritism to PRC 
firms' mining concessions, related mine safety abuses, and concessions 
to Chinese retailers. Miles Larmer and Alastair Fraser, ``Of Cabbages 
and King Cobra: Populist Politics and Zambia's 2006 Election,'' African 
Affairs, (106:425), 2007.
---------------------------------------------------------------------------

U.S. Policy Implications

    As discussed in previous sections, the breadth and 
diversity of China's engagement with Africa present numerous 
potential issues for consideration by U.S. policy makers. These 
range from its impact on democratization, good governance and 
transparency, and adherence to universal norms of civic and 
human rights and the rule of law in Africa to the potential for 
a renewed rise in African indebtedness to China, fast on the 
heels of recent substantial U.S. and Western government write-
downs of past unsustainable African debt. Nascent and 
prospectively rising U.S.-Chinese economic competition in 
Africa, notably in the national energy security-related oil 
sector and strategic metals and minerals trade, also present 
key policy questions. Some are concerned that China's rising 
textile production and export of goods to Africa are negating 
U.S. efforts to strengthen Africa's apparel and other 
productive sectors through the African Growth and Opportunity 
Act program (AGOA), which seeks to bolster Africa production by 
providing duty-free access for diverse U.S. imports from 
Africa. The potential for the growth of a pro-China voting 
block within United Nations agencies and other multilateral 
organizations is also a concern for some.
    Others worry that Africans may be attracted to China's 
respect for African state sovereignty and its policy of non-
interference in states' internal affairs, especially with 
respect to issues of human rights and democracy, particularly 
in contrast to Western donor governments' imposition on 
Africans of political conditionalities in return for credit, 
which some Africans see as paternalistic. Some African states, 
when subjected to sustained or vocal Western policy pressure, 
have already turned to China. While such realignments may not 
be firm or permanent, Angola's spurning relations with the IMF 
in favor of access to Chinese economic ties, Zimbabwe's ties to 
China, and periodic rhetorical threats by countries such as 
Ethiopia to look toward China as an ally when faced by Western 
pressure to democratize or undertake other policy actions all 
raise the possibility that other countries might make similar 
choices. A similar concern relates to the possibility that 
rapidly expanding Sino-African economic cooperation and the 
perceived relevance to Africa of China's rapid economic 
development process may cause Africans to increasingly view 
China as a more relevant political-economic model for Africa 
than Western democracies.\330\
---------------------------------------------------------------------------
    \330\ Stephanie McCrummen, ``Struggling Chadians Dream of a Better 
Life--in China,'' Washington Post, October 6, 2007.
---------------------------------------------------------------------------

                  Figure 22. Map of Sub-Saharan Africa



                                     

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