Introductory Remarks

Members of the committee, I wish to thank you for inviting me to testify before you today on a topic of vital interest to both the economic and national security of the United States. After addressing issues of Most-Favored Nation (MFN) status and the role unilateral U.S. sanctions, I will speak to several problem areas in our relationship with China and ways in which we might better address them. At the outset, while I will address specific topics in today's testimony, let me be clear that the focus of our discussion should be on the need for a comprehensive and consistent policy toward China. Too often, we look at particular sources of tension between our two countries in isolation from one another. For example, to think of the extension of Most-Favored Nation (MFN) status only in the context of trade and human rights, is to ignore the impact it will have on our security relationship with China. Given the crucial role that China plays in diffusing tensions in the region, particularly the Korean peninsula, such thinking invites potential disaster. It is time to stop looking at these narrow issues in a vacuum and recognize the linkages across seemingly disparate issues in constructing a comprehensive policy toward China.

The Ineffectual Weapon of Most-Favored Nation Status

The annual debate over China's MFN status is once again upon us. What is new this year is the entry into the fray of different voices, including social conservatives, labor union protectionists and those expressing concern over possible illegal campaign contributions and religious persecution. What is not new to this debate, however, is the overly polarized nature in which it takes place and the same lack of awareness of the forces at work in China. In its most favorable light, the annual debate over MFN is little more than a charade. Most of us know that we will renew MFN status to China. More important, however, is that the Chinese know this too. But there is a darker side as well. While tough but private diplomacy yielded human rights improvements under the Bush administration, the evidence is clear that the non-credible threats of the Clinton administration in 1993 and 1994 resulted only in greater intransigence and a hardening of Chinese resolve on the issue of human rights.

But suppose for the sake of argument that we did revoke China's MFN status? The language that would best describe such an action would be less the 'sending of a signal' than it would be the 'picking of a fight'--a fight in which there would be few winners outside of a small number of interest groups here in the United States. First, such a move would be ineffective as our allies would not support such a move, much less join us. It is noteworthy that the Hong Kong legislature, led by arguably the most powerful and respected voice for democracy in Hong Kong, Martin Lee, has called upon the United States to abandon this MFN façade. Taiwan has been unenthusiastic about our MFN position as well. Second, heeding their advice is also the best way to promote our interests in China and the region. East Asia is enjoying an economic boom and free-flowing capital and resources are increasingly freeing its citizens from the state. One need only look to South Korea and Taiwan, where I have served, as examples of how a burgeoning middle-class can pressure state leaders to adopt democratic reforms. To focus only on specific incidents or even trends within one or two years is to ignore the overwhelming evidence that the Chinese citizens enjoy more mobility and economic freedom now than at any time in their modern history.

Moreover, as I noted at the beginning of my remarks, it is important to step back and look at how repealing MFN would impact on our broader interests in the region, notably those in the realm of security. Most recently, for example, good relations between China and the U.S. have contributed to amelioration of genocidal conflict in Cambodia. Of paramount concern now, of course, is the crucial role that China plays in diffusing tension on the Korean peninsula. The looming famine in North Korea portends of growing political instability in that country. North Korea has consistently threatened military action. Joint action between the U.S. and China will be crucial to preventing that instability from erupting into war; and such joint action is served little by poisoning our relationship with China. Such aggressive unilateral action against China on the part of the U.S. would also lower the prospects for peaceful resolution of territorial conflicts in the South China Sea.

Unilateral Sanctions

Many of the reasons that justify our setting aside the ineffectual and counterproductive policy tool of Most Favored Nation status, apply to the imposition of unilateral U.S. economic sanctions. Sanctions might serve a useful purpose for dealing with true pariahs of the international system on a case-by-case basis. But our past dealings with China and other countries show that unilateral sanctions are neither effective nor productive in promoting U.S. interests. As is so often the case, our allies 'free-ride' on the benefits of our China-bashing while our firms suffer. China is currently the world's largest growth market for electricity generation and nuclear electric power equipment. All equipment and services that the U.S. can provide are readily available from a variety of global competitors. Given current U.S. law barring nuclear electric exports to China, it should come as little surprise that France, Canada and Russia have supplanted our firms in that market. It was with this in mind that scholars from the Institute of International Economics in the most comprehensive study to date concluded that U.S. sanctions had positive outcomes in fewer than one in five cases in the 1970s and 1980s and that global integration and the diffusion of technology will provide the U.S. with even less leverage in the future.

Legitimate Problem Areas

Having said this, let me identify a number of issues vital to the economic and strategic relations between China and the United States that warrant further discussion.

1. The Problem of Korea

As I noted earlier, developments on the Korean peninsula point ominously toward instability. China will be crucial in preventing this instability from embroiling the region in a potentially costly war. Maintaining a dialogue between the U.S. and China based on mutual respect is the best way to ensure this outcome.

2. Taiwan

China has not renounced the use of force on Taiwan but has indicated force will not be used unless Taiwan formally declares independence. The United States must continue to reaffirm its support of a peaceful resolution of this issue and leave the rest to the Chinese on either side of the Taiwan Strait. We should also encourage their booming economic relationship.

3. Other Territorial Disputes

At present, China is taking a less belligerent approach to settling disputed territorial claims in both the South China Sea and the Diaoyu / Senkaku Islands. While this is a positive development, we should not discount the positive role that a strong U.S. military presence in Asia has had in bringing this result about.

4. The Role of the Chinese Military

Since the late 1980s, China has been undertaking a campaign to modernize its military. This has included the development of inter-continental and submarine-launched ballistic missile programs. It also includes the purchase of the Russian Su-27 fighter aircraft, which are comparable to the U.S. top-of-the-line F-15 C Eagles.

Outside of China's own attempts to modernize its military, there is evidence that China is helping to modernize the military of other nations, notably Pakistan and rogue-nations such as Iran. Discussions of the proliferation of weapons of mass destruction and advanced conventional weapons should figure prominently in our ongoing dialogue with China. We should closely monitor PLA companies for any sign of complicity in proliferation and take action if they are involved.

5. International Trade Issues

While China has made progress on reducing tariff levels, market access to the Chinese economy is still restricted. China continues to protect a number of industries through a variety of non-tariff barriers such as import quotas, value-added taxes, customs duties and the continued subsidies for state-owned enterprises. Another trade issue of concern, of course, is that of intellectual property rights. We have already seen this problem manifest itself in the computer software and compact-disc industries. This problem will certainly become more important as China continues to develop increasingly high-tech industries for export. For now, China has made progress on intellectual property rights and market access, but not enough to slow down the growth of the trade deficit or to gain entry into the World Trade Organization.

6. Human Rights & Hong Kong

Arguably the most salient issue at this time concerns the issue of human rights and the imminent takeover of Hong Kong by China. The United States, with some 1,100 firms operating in Hong Kong, has profound economic interests as well. Ensuring that the rights of the citizenry to a variety of freedoms we hold dear are maintained and promoting economic stability remain important tasks on the agenda for U.S. policy-makers. It is important that religious freedom be maintained in Hong Kong as a model for the rest of China.

Toward a Comprehensive and Consistent U.S. China Policy

Having identified these issue areas, let me set forth some ways we might productively resolve these sources of tension.

First, we should continue and strengthen our military policy of 'credible deterrence' in the region, which means a strong and active U.S. military presence. Despite protestations from a few in the region, it is clear that the U.S. presence is welcomed. And for good reason. While we may consider a reduction in the number of ground troops in the region, it seems wise to consider expanding our naval and air forces in the region. The U.S. should also consider developing a Theater Missile Defense (TMD) program to protect our own and friendly forces in the region. Arguably the most important cornerstone of a 'credible deterrence' policy in Asia is to continue strengthening our bilateral security relations in the region, particularly with Japan, Korea and Australia. While regional security negotiations and forums should not be downplayed or ignored, there seems little reason to attempt to construct a regional security alliance along the lines of NATO, not the least of which is that there is little interest in such an alliance among our Asian allies. For the time being, maintaining bilateral security arrangements should be the focus of U.S. policy. We should also not ignore our bilateral relations with the Chinese military, the People's Liberation Army. Indeed, encouraging contacts between the two might be the best way to persuade them that selling arms to the unstable powers poses a security threat to China as well. These ties might also result in greater transparency which should increase our as of yet sketchy knowledge of China's internal military developments.

Second, with regard to economic issues, it is important to establish tough standards for China on a wide-range of issues. With regard to China's accession into the World Trade Organization, we should establish strict criteria not only for China's entry, but for how to handle China after it is a member. Along with our partners in the WTO, we should establish specific content-based reforms and deadlines that China should meet. Strong multilateral provisions in the context of the World Trade Organization should be in place to redress this issue should China Fail in this regard. These guidelines should cover not only issues of access to the Chinese market and the elimination of non-tariff barriers, but should cover issues of intellectual property rights as well. Permanent Most-Favored Nation status could be a result of China's accommodating these positions.

Third, with regard to human rights issues--we should make clear that Hong Kong is the 'crucible' if you will. How China manages the hand-over in future months will be watched by the entire world community. The United States should make clear that we too will be scrutinizing this phenomenon. Reunification with Taiwan will be delayed, perhaps even by decades should Hong Kong lose its economic vitality and become politically repressed. In so doing, we will also have a lens into how the Chinese government will likely address domestic human rights issues as the Chinese economy develops and a middle-class emerges.

There is clearly a need to depolarize the debates on China policy in the United States. Little is gained by the sweeping, polemical shouting matches between China-bashers on the one side and China-apologists on the other. We should recognize this debate for what it is--a false dichotomy that does not serve U.S. interests. Instead, a more nuanced policy is needed. Just as we should not isolate or cast China in the role of rogue or pariah state, we should not apologize for its actions, much less appease China and pretend that all will be fine. There is some reason for optimism, but this optimism must be based on sound U.S. foreign policy which takes into account the linkages between economic and security issues. Looking at individual sources of tension in the U.S.-China relationship might serve narrowly defined interest groups, it does not serve the interests of the United States, however. In conclusion, we must recognize the need and possibility for a policy that is on the one hand firm on our principles, and on the other hand is cognizant of the realities that China as an emerging power entails.

James R. Lilley is a senior fellow at AEI.