[Congressional Record Volume 148, Number 97 (Wednesday, July 17, 2002)]
[Senate]
[Pages S6937-S6940]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




          U.S.-CHINA SECURITY REVIEW COMMISSION ANNUAL REPORT

  Mr. BYRD. Mr. President, the U.S.-China Security Review Commission on 
Monday released its first annual report, as directed by the Congress in 
its authorizing statute, P.L. 106-398, October 30, 2000. It is a broad-
ranging analysis, with major recommendations for consideration. I will 
ask unanimous consent that the Executive Summary be printed in the 
Record at the conclusion of my remarks.
  The report is extensive, thorough, and disturbing in many respects. 
It paints a detailed portrait of a China determined to: acquire a vast 
array of high technology; broaden and deepen its industrial base; 
expand its research and development capabilities; and attract 
substantial amounts of American and other foreign investment. China is 
on the move. But, it is worthwhile to note that China pays for much of 
its progress through a highly imbalanced trade relationship with the 
U.S. Last year the U.S. trade deficit with China exceeded $80 billion 
U.S. dollars.
  One could simply say that the Chinese are intent on entering the 
modern era, and on building a strong nation state, financed by 
aggressively exporting goods to the U.S. But, Mr. President, there are 
some very troubling aspects of the U.S./Chinese relationship.
  The Commission found that U.S. policy toward China has been and is 
alarmingly fragmented. It lacks consistency and depth. U.S. policy 
toward China has often been driven solely by commercial interests, 
specific human rights issues, or by a particular military crisis, 
rather than by a comprehensive examination of all the issues which 
impact upon this relationship. Furthermore, over the last 30 years U.S. 
policy toward China has been dominated by strong Executive branch 
personalities and compulsive secrecy. There seems to be little 
sustainable consensus on the long-term national interests of the U.S. 
vis a vis China.
  The Report makes numerous recommendations designed to elicit a more 
comprehensive understanding of China by U.S. policy makers and by the 
general public. These include rebuilding the Library of Congress' China 
collection, new language and area studies programs, new efforts at open 
source collection by the intelligence community, and an upgrading of 
the Federal Broadcast Information Service. The fact is that we as a 
nation know far too little about China, and we need a better level of 
effort in this regard.
  There is new information and analysis in the Commission's report 
regarding Chinese access to U.S. capital markets, and a renewed call 
for more effective consultations and consensus-building between the 
President and Congress on Taiwan policy. The report also recommends new 
tools which should be employed to encourage the Chinese to comply with 
their commitments--in proliferation practices, prison labor agreements, 
intellectual property agreements enforcement, and most importantly, 
with their far-reaching obligations under the WTO.
  The report calls for increased scrutiny of corporate activities in 
China, and a new corporate reporting system to reveal what investment, 
R&D and technology is being sent to China. Transparency, disclosure and 
corporate accountability should be required of U.S. firms' operations 
in China, and are certainly of much interest to American shareholders 
and investors.
  I am pleased that the Report is a strong bipartisan effort, a broad 
consensus of nearly all the Commissioners, who approved it by a vote of 
11-1. It is both an educational report and an action document. Each 
chapter highlights findings and makes recommendations for action which 
flow from those findings. The executive summery gives the key 21 
recommendations, but additional valuable proposals are found at the end 
of each chapter.
  Some of the Report's key findings about the U.S.-China relationship 
include:
  The U.S.-China bilateral relationship is poorly coordinated and lacks 
a sustainable consensus among elected officials in Congress and the 
Executive branch;

[[Page S6938]]

  China's leaders see the United States as a declining power with 
important military vulnerabilities that can be exploited;
  There are serious differences in perceptions each country holds of 
the other and a potential for misunderstandings that are compounded by 
the lack of bilateral institutions for confidence-building and crisis-
management;
  There is plausible evidence that the burgeoning trade deficit with 
China will worsen despite China's entry into the World Trade 
Organization (WTO);
  The U.S. may be developing a reliance on Chinese imports that could 
in time undermine the U.S. defense industrial base;
  The U.S. lacks adequate institutional mechanisms to monitor national 
security concerns involving Chinese and other foreign entities seeking 
to raise capital in the U.S. debt and equity markets;
  China provides technology and components for weapons of mass 
destruction and their delivery systems to terrorist sponsoring states, 
presenting an increasing threat to U.S. security interests, in the 
Middle East and Asia in particular.
  Radical changes in China's economic fortunes have been fueled by U.S. 
investors and multinational firms, and have come with severe sacrifices 
in the form of lost American manufacturing jobs.
  Mr. President, there is much to recommend in this Report, and many 
recommendations which may be of interest to my colleagues.
  I congratulate the Chairman and all of the commissioners who authored 
this fine report, as well as the staff members of the Commission who 
worked tirelessly on this important endeavor.
  Mr. President, I ask unanimous consent that the executive summary be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                           Executive Summary

       Relations between the United States and China during the 
     last half-century have not always been smooth. The two 
     countries have sharply contrasting worldviews, competing geo-
     strategic interests, and opposing political systems. More 
     recently, bilateral ties have centered on rapidly growing 
     economic interactions that have muted political differences. 
     For the moment, these relations have not softened China's 
     egregious behavior on human rights nor changed its strategic 
     perceptions that the U.S. is its principal obstacle to 
     growing regional influence. No one can reliably predict 
     whether relations between the U.S. and China will remain 
     contentious or grow into a cooperative relationship molded by 
     either converging ideologies or respect for ideological 
     differences, compatible regional interests, and a mutually 
     beneficial economic relationship.
       However the relationship develops, it will have a profound 
     impact on the course of the twenty-first century. The 
     policies pursued today by both China and the United States 
     will affect future relations. The Congress created the U.S.-
     China Security Review Commission to assess ``the national 
     security implications and impact of the bilateral trade and 
     economic relationship between the United States and the 
     People's Republic of China'' and to report its conclusions 
     annually to the Congress. It specifically directed the 
     Commission to focus on our deepening economic, trade, and 
     financial linkages with China. The Congress wanted the 
     Commission to evaluate whether our economic policies with 
     China harm or help United States national security and, based 
     on that assessment, to make recommendations in those areas 
     that will improve our nation's interests.
       National security has come to include military, economic 
     and political relationships. At any time, one of these 
     concerns may dominate. They interact with one another and 
     affect our overall security and well-being. Neglect of any 
     one element will diminish our overall security as a nation. 
     The United States must be attentive to the strength and 
     readiness of our military forces, the health of our economy, 
     and the vibrancy of our political relationships.
       The Congress also asked the Commission to include in its 
     Report ``a full analysis, along with conclusions and 
     recommendations for legislative and administrative actions.'' 
     This is the Commission's first Report. In keeping with the 
     Congressional mandate, this Report provides a comprehensive 
     analysis of the Commission's year-long review of U.S.-China 
     relations, the principal findings that emerged from that 
     investigation, and the recommendations or measures the 
     Commission believes should be implemented to help safeguard 
     our national security in the years ahead. This initial Report 
     provides a baseline against which to measure and assess year-
     to-year changes in the relationship.


                              Main Themes

       Our relationship with China is one of the most important 
     bilateral relationships for our nation. If if is not handled 
     properly, it can cause significant economic and security 
     problems for our country. China is emerging as a global 
     economic and military power, and the United States has 
     played, and continues to play a major role in China's 
     development.
       China's foreign trade has skyrocketed over the past twenty 
     years (from approximately $20 billion in the late 1970s to 
     $475 billion in 2000). Our trade deficit with China has grown 
     at a sharp rate, from $11.5 billion in 1990 to $85 billion in 
     2000. Foreign investment--with America a leading investor--
     grew apace. This trade and investment has helped to 
     strengthen China both economically and militarily.
       America's policy of economic engagement with China rests on 
     a belief that the transition to a free market economy and the 
     development of the rule of law in China's business sector 
     would likely lead to more political and social openness and 
     even democracy. This belief, along with the desire to expand 
     American commercial interests, drove U.S. support for China's 
     entry into the World Trade Organization (WTO). Many also 
     believe that a more prosperous China will be a more peaceful 
     country, especially if it is fully integrated into the 
     Pacific and world economies.
       But these are hypotheses, and many leading experts are 
     convinced that certain aspects of our policy of engagement 
     have been a mistake. They argue that the PRC faces enormous 
     economic and social problems, that its leaders are 
     intractably antidemocratic, that they are hostile to the U.S. 
     and its prominent role in Asia, and that we are strengthening 
     a country that could challenge us economically, politically 
     and military.
       The Commission does not believe that anyone can confidently 
     forecast the future of China and the U.S.-China relationship, 
     and contends that while we may work and hope for the best, 
     our policymakers should prepare for all contingencies.
       Over the past twenty years, China has created a more 
     market-based economy and allowed more social and economic 
     freedom. Chinese participation in international security and 
     economic regimes has grown. On the other hand, China has made 
     little progress toward granting its citizens political and 
     religious freedom, and protecting human and labor rights. In 
     fact, the government has notably increased its repression of 
     some religious practices, including its brutal campaign 
     against the Alum Gong.
       Chinese leaders have repeatedly stressed to their Communist 
     Party support and the Chinese people that they have no desire 
     to repeat in China the political and economic collapse that 
     took place in the former Soviet Union. They seek to maintain 
     and strengthen the Communist Party's political and social 
     control while permitting freer economic activity. They 
     consistently limit the freedom of the Chinese people to 
     obtain and exchange information, practice their religious 
     faith, to publicly express their convictions, and to join 
     freely organized labor unions. Chinese leaders frequently use 
     nationalistic themes to rally support for their actions, 
     including crack downs on dissenters.
       China is thus embarked on a highly questionable effort--to 
     open its economy but not its political system--the outcome of 
     which will influence the destinies of many countries, 
     including our own. If the economy fails, or if the Chinese 
     people demand full freedom instead of merely a taste of it, 
     then the leaders will have to choose between reasserting 
     central control and granting greater political and social 
     freedom, with a consequent weakening of their own authority. 
     On the other hand, if China becomes rich but not free, the 
     United States may face a wealthy, powerful nation that could 
     be hostile toward our democratic values, to us, and in direct 
     competition with us for influence in Asia and beyond.
       American policymakers must take these scenarios seriously, 
     and to that end the Commission has established benchmarks 
     against which to measure future change. There are important 
     areas in which Chinese policy runs directly counter to U.S. 
     national security interests, such as not controlling exports 
     that contribute to the proliferation of weapons of mass 
     destruction, its close relations with terrorist-sponsoring 
     states like Iran, Iraq, Syria, Libya, Sudan and North 
     Korea, its expanding long-range missile forces, its 
     threatening policies toward Taiwan, and its pursuit of 
     both asymmetric warfare capabilities and modern military 
     technology that could menace American military forces.
       China's leaders view the United States as a partner of 
     convenience, useful for its capital technology, know-how and 
     market. They often describe the United States as China's 
     long-term competitor for regional and global military and 
     economic influence. Much rhetoric and a considerable volume 
     of official writings support this hypothesis. The recent 
     empirical study of Chinese newspapers' coverage of the U.S., 
     conducted by University of Maryland scholars for the 
     Commission, found a divided perspective: articles in these 
     newspapers, which we believe generally represent the views of 
     the leadership, are consistently positive on trade and 
     investment matters and applaud Sino-U.S. cooperation in these 
     areas. In contrast, their coverage of U.S. foreign policy is 
     largely negative and frequently depicts the U.S., as 
     hegemonic and unilateralist.

[[Page S6939]]

       In time we will learn whether China is to become a 
     responsible world power or an aggressive, wealthy 
     dictatorship, and whether the Communist Party maintains its 
     monopoly of political power or shares it with the Chinese 
     people. We will also learn whether the Chinese economy 
     flourishes or stumbles and collapses under the burden of 
     state-owned industries, a weak banking system, enormous debt, 
     wide-scale corruption, social dislocation, and the new 
     challenges of international competition brought about by its 
     WTO entry.
       Current U.S. policies and laws fail to adequately monitor 
     the transfers of economic resources and security-related 
     technologies to China, considering the substantial 
     uncertainties and challenges to U.S. national interests in 
     this relationship. This Report attempts to begin to address 
     these uncertainties, trends, and challenges in a systematic 
     manner. It proceeds on the premise that far more prudence 
     must be displayed and far better understanding developed on 
     the part of the Congress on the full extent of this 
     relationship and its impact on U.S. interests. In addition, 
     too little attention has been devoted to the adverse impact 
     of recent Chinese economic strength on our Asian allies and 
     friends. The Commission believes the U.S. must develop a 
     better understanding of the vulnerabilities and needs of our 
     Asian allies and friends, and must carefully construct 
     policies to protect and nurture those relationships.


                       summary of recommendations

       The Commission has identified its key findings and 
     recommendations with each chapter in this Report. The 
     Commission developed more than forty recommendations that are 
     listed with each of the ten chapters. We have prepared a 
     separate classified report providing additional details and 
     recommendations. Here, we highlight and summarize those 
     recommendations we believe are the highest priority and which 
     we recommend for immediate action. A more extended analysis 
     is contained in each of the Report's ten chapters.


                   conflicting national perspectives

       The United States Government is poorly organized to manage 
     our increasingly complex relationship with China. We are not 
     adequately informed about developments within China and about 
     their leaders' perceptions of the U.S., and we dedicate 
     insufficient resources to understand China. Because Chinese 
     strategic thinking and analysis of military planning differ 
     markedly from our own, our incomplete understanding enhances 
     the possibilities for miscalculation, misunderstanding, 
     and potential conflict.
       Recommendation 1: The U.S. Government should expand its 
     collection, translation and analysis of open source Chinese-
     language materials, and make them available to the larger 
     community. Despite two studies advocating an improved 
     collection of Chinese materials at the Library of Congress, 
     its collection is nearly unusable and shameful. Congress 
     should provide funds to implement recommendations already 
     submitted by the two previous studies. In addition, the 
     Commission recommends increased funding for Chinese language 
     training and area studies programs, similar to the program in 
     the National Defense Education Act of 1958, and incentives 
     for post-secondary graduates to participate in government 
     services. The relevant executive branch agencies should 
     report annually to the Congress on steps taken to rectify 
     this situation.
       Recommendation 2: The U.S. should develop a comprehensive 
     inventory of official government-to-government and U.S. 
     Government-funded programs with China. The President should 
     designate an executive branch agency to coordinate the 
     compilation of a database of all such cooperative programs. 
     The database should include a full description of each 
     program, its achievements to date, and the benefits to the 
     U.S. and should be prepared annually in both classified and 
     unclassified forms. The Commission further recommends that 
     the executive branch prepare a biannual report, beginning in 
     2004, on the cooperative Science and Technology (S&T) 
     programs with China patterned on the report submitted to 
     Congress in May 2002 at the request of Senator Robert C. 
     Byrd. The President should establish a working group to set 
     standards for S&T transfers, monitor the programs, and 
     coordinate with the intelligence agencies.
       Recommendation 3: The Commission recommends that Congress 
     encourage the Department of Defense to renew efforts to 
     develop military-to-military confidence building measures 
     (CBMs) within the context of a strategic dialogue with China 
     and based strictly on the principles of reciprocity, 
     transparency, consistency, and mutual benefit.


     Managing U.S.-China Economic Relations (Trade and Investment)

       The United States has played a major role in China's rise 
     as an economic power. We are China's largest export market 
     and a key investor in its economy. Fueled by China's 
     virtually inexhaustible supply of low-cost labor and large 
     inflows of foreign direct investment (FDI), the U.S. trade 
     deficit with China has grown at a furious pace--from $11.5 
     billion in 1990 to $85 billion in 2000. The U.S. trade 
     deficit with China is not only our largest deficit in 
     absolute terms but also the most unbalanced trading 
     relationship the U.S. maintains. U.S. trade with China is 
     only 5 percent of total U.S. trade with the world but our 
     trade deficit with China is 19 percent of the total U.S. 
     trade deficit. U.S. exports to China are only 2 percent of 
     total U.S. exports to the world, while we import over 40 
     percent of China's exports.
       Foreign direct investment has helped China leapfrog forward 
     both economically and technologically. These developments 
     have provided China with large dollar reserves, advanced 
     technologies, and greater R&D capacity, each of which has 
     helped make China an important world manufacturing center and 
     a growing center of R&D, which are contributing to its 
     military-industrial modernization. U.S. companies have 
     difficulty competing with Chinese based companies, in 
     large part, because the cost of labor in China is 
     depressed through low wages and denial of worker rights. 
     Essentially, Chinese workers do not have the ability to 
     negotiate their wages. Attracted in part by the low wages 
     in China, a growing number of U.S. manufacturers are now 
     operating in China, many of whom are utilizing China as an 
     ``export platform'' to compete in U.S. and global markets.
       China's large trade surplus with the United States, the 
     inflow of U.S. private investment into China, and China's 
     access to U.S. capital markets each contributes, directly or 
     indirectly, to China's economic growth and military 
     modernization.
       Recommendation 4: The Commission recommends the creation of 
     a federally mandated corporate reporting system that would 
     gather appropriate data to provide a more comprehensive 
     understanding of the U.S. trade and investment relationship 
     with China. The reporting system should include reports from 
     U.S. companies doing business in China on their initial 
     investment, any transfers of technology, offset or R&D 
     cooperation associated with any investment, and the impact on 
     job relocation and production capacity from the United States 
     or U.S. firms overseas resulting from any investment in 
     China.
       Recommendation 5: The Commission recommends that the U.S. 
     make full and active use of various trade tools including 
     special safeguards provisions in the WTO to gain full 
     compliance by China with its World Trade Organization (WTO) 
     accession agreement.


               China's WTO Membership: Conflicting Goals

       The U.S. and China hold differing goals for China's 
     membership in the WTO. (The Chinese saying for this situation 
     is: ``same bed, different dreams''). China's leadership 
     sought WTO membership to further the nation's economic reform 
     and growth through export production and the accumulation of 
     foreign investment, capital, and technology in order to 
     become a world power. U.S. support for China's WTO membership 
     was intended to enhance market access for U.S. goods and 
     services, and also to promote internal economic, political 
     and civil reforms, including a more open society.
       China has instituted legal reforms to supervise foreign 
     direct investment (FDI), financial markets and private 
     businesses in order to stimulate trade and investment and 
     fulfill the country's WTO commitments. The development of a 
     commercial rule of law in China faces numerous obstacles, 
     including the lack of an independent judiciary and trained 
     judges, local protectionism, and widespread corruption. 
     Despite some advances in commercial legal reforms, China 
     remains grossly deficient in granting its citizens civil and 
     political freedoms, and makes widespread use of prison labor.
       Recommendation 6: The Commission recommends that Congress 
     renew the Super 301 provision of U.S. trade law and request 
     the Administration to identify and report on other tools that 
     would be most effective in opening China's market to U.S. 
     exports if China fails to comply with its WTO commitments. In 
     examining these tools, priority should be given to those 
     industry sectors where China expects rapid economic growth in 
     exports to the U.S. market.
       Recommendation 7: Congress should authorize and appropriate 
     additional funds to strengthen the Commerce Department's 
     support for commercial rule of la reform in China, including 
     intellectual property rights and WTO implementation 
     assistance, and to strengthen the Department of State's 
     promotion of capacity-building programs in the rule of 
     law, administrative reform, judicial reform and related 
     areas.
       Recommendation 8: The U.S. should improve enforcement 
     against imports of Chinese goods made from prison labor by 
     shifting the burden of proof to U.S. importers and by more 
     stringent requirements relating to visits to Chines 
     facilities suspected of producing and exporting prison-made 
     goods to the United States. (Note: The Commission made 
     recommendations to Congress on this issue in a May 2002 
     letter).
       Recommendation 9: The Commission recommends that Congress 
     request the annual Trade Promotion Coordination Committee 
     (TPCC) report prepared by the Department of Commerce include 
     an assessment of China's progress in compliance with its WTO 
     commitments, recommendations on initiatives to facilitate 
     compliance, and a survey of market access attained by key 
     U.S. industry sectors in China, including agriculture. The 
     report should include comparisons of U.S. market access in 
     those key industry sectors with those gained by the European 
     union and Japan.
       Recommendation 10: The Commission recommends that Congress 
     urge the U.S. Trade Representative (USTR) to request WTO 
     consultations on China's noncompliance with its obligations 
     under the Trade-related Aspects

[[Page S6940]]

     of Intellectual Property Rights (TRIPS) Agreement, 
     particularly its inadequate enforcement, to deter China's 
     counterfeiting and piracy of motion pictures and other video 
     products. If China fails to respond, Congress should 
     encourage the USTR to request a WTO dispute settlement panel 
     be convened on the matter.
       Recommendation 11: Congress mandated the Commission to 
     evaluate and make recommendations on invoking Article XXI of 
     the General Agreement on Tariffs and Trade (GATT), relating 
     to security exceptions from GATT obligations. The Commission 
     believes that the steel industry is a possible candidate for 
     using Article XXI. If the Administration's current safeguard 
     measures prove ineffective, the Commission recommends that 
     Congress consider using Article XXI to ensure the survival of 
     the U.S. steel industry.


                     accessing u.s. capital markets

       Chinese firms raising capital or trading their securities 
     in U.S. markets have almost exclusively been large state-
     owned enterprises, some of which have ties to China's 
     military and intelligence services. There is a growing 
     concern that some of these firms may be assisting in the 
     proliferation of weapons of mass destruction of ballistic 
     missile delivery systems. The U.S. lacks adequate 
     institutional mechanisms to monitor national security 
     concerns raised by certain Chinese and other foreign entities 
     accessing the U.S. debt and equity markets. We also lack 
     sufficient disclosure requirements to inform the investing 
     public of the potential risks associated with investing in 
     such entities.
       Recommendation 12: The Commission recommends that foreign 
     entities seeking to raise capital or trade their securities 
     in U.S. markets be required to disclose information to 
     investors regarding their business activities in countries 
     subject to U.S. economic sanctions.
       Recommendation 13: The Commission recommends that the 
     Treasury Department, in coordination with other relevant 
     agencies, assess whether China or any other country 
     associated with the proliferation of weapons of mass 
     destruction or ballistic-missile delivery systems are 
     accessing U.S. capital markets and make this information 
     available to the Securities Exchange Commission (SEC). state 
     public pension plans, and U.S. investors. Entities sanctioned 
     by the Department of State for such activities should be 
     denied access to U.S. markets.


              proliferation of weapons of mass destruction

       China fails to control the export of dual-use items that 
     contribute to the proliferation of weapons of mass 
     destruction and their delivery systems. China is a leading 
     international source of missile-related technologies. Its 
     proliferation activities with terrorist-sponsoring and other 
     states, despite commitments to the U.S. to ease such 
     activities, present serious problems for U.S. national 
     security interests, particularly in the Middle East and Asia.
       Recommendation 14: The Commission recommends that the 
     President be provided an extensive range of options to 
     penalize foreign countries for violating commitments or 
     agreements on proliferation involving weapons of mass 
     destruction and technologies and delivery systems relating to 
     them. All current statutes dealing with proliferation should 
     be amended to include a separate authorization for the 
     President to implement economic and other sanctions against 
     offending countries, including quantitative and qualitative 
     export and import restrictions, restricting access to U.S. 
     capital markets, controlling technology transfers, and 
     limiting U.S. direct investment.
       Recommendation 15: The United States should work with the 
     United Nations Security Council and other appropriate inter-
     governmental organizations to formulate a framework for 
     effective multilateral action to counter proliferation of 
     weapons of mass destruction and their delivery systems. 
     Member states found in violation of the agreed framework 
     should be subject to international sanctions.
       Recommendation 16: The United States should continue to 
     prohibit satellite launch cooperation with China until it 
     puts into place an effective export-control system consistent 
     with its November 2000 commitment to the U.S. to restrict 
     proliferation of weapons of mass destruction and associated 
     technologies to other countries and entities.


                  cross-strait and regional relations

       Cross-strait relations are a major potential flashpoint in 
     U.S.-China relations. Economic and people-to-people 
     interactions between Taiwan and the Mainland have increased 
     dramatically in recent years, raising prospects that such 
     interactions could help ameliorate cross-strait political 
     tensions. At the same time, China is enhancing its capability 
     to carry out an attack across the Taiwan Strait with special 
     operations, air, navy and missile forces. It continues to 
     deploy short- and intermediate-range missiles opposite Taiwan 
     and although the threat of an immediate attack appears to be 
     low, this buildup appears designed to forestall pro-
     independence political movements in Taiwan and help bring 
     about an eventual end to the Island's continued separate 
     status.
       China's economic integration with its neighbors in East 
     Asia raises the prospects of an Asian economic area dominated 
     or significantly influenced by China. The U.S. has an 
     interest in China's integration in Asia if it gives all 
     parties a stake in avoiding hostilities. Nonetheless, U.S. 
     influence in the area could wane to a degree, particularly on 
     economic and trade matters.
       Recommendation 17: The Commission recommends that the 
     Department of Defense continue its substantive military 
     dialogue with Taiwan and conduct exchanges on issues ranging 
     from threat analysis, doctrine, and force planning.
       Recommendation 18: The Commission recommends making 
     permanent those provisions in the fiscal years 2001 and 2002 
     Foreign Operations Appropriations Acts providing for 
     executive branch briefings to the Congress on regular 
     discussions between the administration and the government on 
     Taiwan pertaining to U.S. arms sales to Taiwan.
       Recommendation 19: The Commission believes that the 
     Congress should encourage the Administration to initiate 
     consultations with other Asian countries to assess and make 
     recommendations on the impact of the ``hollowing out'' 
     phenomenon with respect to China on regional economies and on 
     U.S. economic relations with the region.


                        china's military economy

       China's official defense spending has expanded by more than 
     one-third in the past two years. The Commission estimates 
     that China's official defense budget represents about one-
     third of its actual spending level. Its ability to increase 
     defense spending in the face of competing priorities is 
     supported by its rapid economic growth. China has the largest 
     standing army in the world and ranks second in actual 
     aggregate spending. The military's role in China's economy 
     has been reduced in recent years, but the military derives 
     extensive financial and technological benefits from the 
     growth and modernization of the domestic economy, which is 
     designed to serve it.
       Recommendation 20: The Commission recommends that the 
     Secretary of Defense prepare a biannual report on critical 
     elements of the U.S. defense industrial base that are 
     becoming dependent on Chinese imports or Chinese-owned 
     companies. The Department of Defense should also update its 
     acquisition guidelines and develop information from defense 
     contractors on any dependency for critical parts of essential 
     U.S. weapons systems.


             technology transfers and military acquisitions

       China has a well-established policy and program to acquire 
     advanced technologies for its industrial development, 
     military capabilities and intelligence services. Over the 
     next ten years, China intends to acquire an industrial 
     capability to build advanced conventional and strategic 
     weapons systems. Current U.S. policies do not adequately 
     consider the impact of the transfers of commercial and 
     security-related technologies to China.
       Recommendation 21: The Commission recommends that the 
     Department of Defense and the FBI jointly assess China's 
     targeting of sensitive U.S. weapons-related technologies, the 
     means employed to gain access to these technologies and the 
     steps that have been and should be taken to deny access and 
     acquisition. This assessment should include an annual report 
     on Chinese companies and Chinese PLA-affiliated companies 
     operating in the United States. Such reports are mandated by 
     statute but have never been provided to Congress.
       The Commission cannot forecast with certainty the future 
     course of U.S.-China relations. Nor can we predict with any 
     confidence how China and Chinese society will develop in the 
     next ten to twenty years. We do know that China now ranks 
     among our most important and most troubling bilateral 
     relationships and believe that China's importance to the 
     United States will increase in the years ahead. As its 
     economy and military grow and its influence expands, China's 
     actions will carry increased importance for the American 
     people and for our national interests.
       For this reason, the Commission believes that there is a 
     pressing need to fully understand the increasingly complex 
     economic, political and military challenges posed by China's 
     drive toward modernity. To gain such comprehension will 
     require the allocation of more resources and the elevation of 
     China in our foreign and national security priorities. The 
     Commission hopes that U.S.-China relations will develop in a 
     positive direction but we must urge that this outcome, though 
     preferred, may not happen. The U.S. must, therefore, be 
     prepared for all possible contingencies.

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