[Senate Hearing 109-239]
[From the U.S. Government Publishing Office]
S. Hrg. 109-239
THE EMERGENCE OF CHINA THROUGHOUT ASIA: SECURITY AND ECONOMIC
CONSEQUENCES FOR THE UNITED STATES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON EAST ASIAN
AND PACIFIC AFFAIRS
OF THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 7, 2005
__________
Printed for the use of the Committee on Foreign Relations
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
LISA MURKOWSKI, Alaska BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
------
SUBCOMMITTEE ON EAST ASIAN
AND PACIFIC AFFAIRS
LISA MURKOWSKI, Alaska, Chairman
LAMAR ALEXANDER, Tennessee JOHN F. KERRY, Massachusetts
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island RUSSELL D. FEINGOLD, Wisconsin
GEORGE ALLEN, Virginia BARACK OBAMA, Illinois
(ii)
C O N T E N T S
----------
Page
Dalpino, Catharin E., Adjunct Professor of Southeast Asian
Studies, Edmund A. Walsh School of Foreign Service, Georgetown
University, School of Advanced International Studies, Johns
Hopkins University, Washington, D.C............................ 46
Prepared statement........................................... 49
Herberg, Mike, Director, Asian Energy Security Program, The
National Bureau of Asian Research, Seattle, Washington......... 38
Prepared statement........................................... 40
Hill, Christopher, Assistant Secretary for East Asia and the
Pacific, Department of State................................... 11
Prepared statement........................................... 13
Murkowski, Hon. Lisa, U.S. Senator from Alaska................... 1
Obama, Hon. Barack, U.S. Senator from Illinois................... 10
Pei, Minxin, Senior Associate, Carnegie Endowment for
International Peace, Washington, D.C........................... 32
Prepared statement........................................... 33
Additional Information Submitted for the Record
Statement submitted by David Lampton, Dean of Faculty and
Director of China Studies, School of Advanced International
Studies, Johns Hopkins University, Washington, D.C............. 4
(iii)
THE EMERGENCE OF CHINA
THROUGHOUT ASIA: SECURITY AND
ECONOMIC CONSEQUENCES FOR
THE UNITED STATES
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Tuesday, June 7, 2005
U.S. Senate,
Subcommittee on East Asian and Pacific Affairs,
Committee on Foreign Relations,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:35 p.m. in
Room SD-419, Dirksen Senate Office Building, Hon. Lisa
Murkowski, Chairman of the subcommittee, presiding.
Present: Senators Murkowski, Voinovich, Feingold, and
Obama.
OPENING STATEMENT OF HON. LISA MURKOWSKI,
U.S. SENATOR FROM ALASKA
Senator Murkowski. We will call to order the Subcommittee
on East Asia and the Pacific. We would like to welcome all of
you here this afternoon. The topic of today's hearing is The
Emergence of China Throughout Asia: Security and Economic
Consequences for the United States.
We have two panels with us this afternoon. The first panel,
we are honored to be joined by the Assistant Secretary of State
for East Asia and the Pacific, Mr. Chris Hill. Welcome to you.
Our second panel features Mikkal Herberg, with the National
Bureau of Asian Research, who has done a considerable amount of
research into China's growing energy needs. We also have
Catharin Dalpino, an Adjunct Professor of Southeast Asian
Studies at Georgetown and the George Washington Universities,
who recently completed a survey of China's growth in Southeast
Asia, and Dr. Minxin Pei, a Senior Associate with the Carnegie
Endowment for International Peace, who has been published
extensively on China's economic, legal, and political reforms.
I had also hoped to have a representative from the
Department of Defense with us, as well, but I understand a
security conference in Singapore, attended by Secretary
Rumsfeld this past weekend, has occupied those officials who
focus on East Asia and the Pacific. I do appreciate that
Secretary Rumsfeld's focus on China's military buildup makes
this hearing all that more timely.
Now, the purpose of today's hearing is not to air
grievances about China or to discuss ways to contain China's
development. The intent is, rather, to take a broad view of
China's growth in the East Asia region, what that growth means
for the U.S., and what policy decisions should be taken to
maintain and grow our presence in the region politically,
economically, and militarily.
Individual actions by China around the region may not, in
themselves, seem particularly significant, but, taken together,
it is clear that China is moving forward with a long-term
strategy to promulgate its influence. Whatever name you want to
give it, whether it is charm offensive, smile strategy,
peaceful rise, or development, it is proving to be effective.
China has replaced the United States as Japan, South Korea,
and Taiwan's largest trading partner. In just the past few
months, China agreed to invest $10 billion in Indonesia as part
of a new strategic agreement. President Hu met with two
Taiwanese opposition leaders, and Beijing and Manila signed two
agreements to foster better military and security cooperation.
Premier Wen's visit to India in April sought to defuse
border tensions and led to the announcement of a strategic
partnership to improve economic cooperation and bilateral ties.
China and India are renovating the old Stillwell Road built by
the U.S. and China during World War II and named after the U.S.
Commander of Allied Forces for the China/Burma/India theater.
The Stillwell Road stretches from Southern China through a good
portion of Burma and into Northeast India and will facilitate
increased commercial and military ties, not just between China
and India, but all Southeast Asia.
China is also helping Pakistan develop the port of Gwadar,
near the Iranian border, as it seeks friendly ports of call in
Southeast Asia. And China plays a central role in the six-
member Shanghai Cooperation Organization that is focused on
combating terrorism in the region.
You throw in China's willingness to allow tensions with
Japan to escalate, and it is clear that China is looking to
exert its influence in the foreign policy area. The bottom line
is that China has a plan and they are successfully implementing
it.
Our question today is, what is the United States' plan as
it relates to that? What does China's increasing influence mean
for United States security concerns, and how does that impact
our relations with our traditional allies?
U.S. and China interests do not always coincide. Will Asian
nations be willing to offend their large neighbor to advance
U.S. interests? It is not as if they can pack up their country
and move in order to avoid potential conflict.
From a security standpoint, China's development of a blue-
water navy raises concerns about our commitments under the
Taiwan Relations Act and control of certain trade chokepoints--
namely, the Strait of Malacca.
On the economic front, just last week the USA Today
reported that China's investment in North Korea jumped from
$1.3 million in 2003 to $200 million last year, yet China has
not indicated a willingness to use its economic influence to
bring North Korea back to the Six-Party Talks. So, where will
it use its economic influence? With Japan and South Korea now
more trade dependent on China than the U.S., does that impact
the United States' ability to promote its interests in the
region?
China runs a trade surplus with each of the world's three
largest economic centers--the U.S., the European Union, and
Japan--yet because of their heavy purchases of raw materials
from neighboring countries, some analysts believe China's
global trade surplus will fall to zero in the next few years.
So, those countries who export raw materials enjoy a trade
surplus with China. How does that impact their interests?
At the same time, the U.S. economy remains a strength. We
have been the driving force for the global economy for some
time. Even as China is experiencing 9 to 10 percent annual
growth rates, signs are appearing that China is seeking to cool
its economy before it overheats. But could that cool-down
result in a hard landing for other countries in the region that
rely on exports to China?
Foreign-funded enterprises now account for about 55 percent
of China's exports and imports. The United States consumer
contributes to all of Asia's prosperity by buying goods made in
Chinese factories, which, in turn, purchase components and raw
materials from Asian suppliers. If there is a protectionist
backlash in the U.S. at Chinese imports, it does not impact
just China, but all nations whose companies export raw
materials to China.
On the energy front, my state of Alaska is rich in natural
resources. Our state budget is heavily impacted by the price of
oil. China's rapid economic development has been a leading
reason for the rising global demand for energy and raw natural
resources.
Steel prices, once low enough, just a few years ago, to
lead the President to provide import relief for domestic
companies, have increased considerably. We are trying to build
a natural-gas pipeline up in Alaska. The Chinese demand for
steel for construction purposes makes our project that much
more expensive to pursue. And although we are an ocean apart,
China's demand for raw resources is having an impact on the
United States, and we need to approach this issue with our eyes
wide open.
When it comes to energy imports, Canada's importance to the
United States is not widely recognized, but they are the United
States' largest foreign supplier of energy, and China is
investing heavily in Canada's oil sands, constructing a
pipeline from Alberta to the West Coast to export that oil.
Just as we often overlook the fact that Canada is our largest
foreign source of energy, we also tend to believe that our
northern neighbor will always be a secure energy source for the
United States, not for other nations. Well, China has brought
the competition for natural resources to our backyard.
In taking the long-term look, I would be remiss not to
mention education. Our current strengths will not have lasting
power if the next generation is not able to continue and build
upon our successes.
I had hoped to have Mr. David Lampton, Dean of Faculty and
Director of China Studies at SAIS and the Nixon Center, with us
today, as well, but, unfortunately, scheduling conflicts did
not allow that to occur. Mr. Lampton did provide the committee
with written testimony for the record, and I would like to note
that, in that testimony, Mr. Lampton points out that, in 2002,
China and the U.S. graduated approximately equal numbers of
graduate-level engineering degrees, but China graduated almost
3.5 times as many undergraduate engineering degrees. He also
notes that U.S. engineering schools have substantial
enrollments of non-citizen students. The National Science
Foundation predicts that by 2010 China could be turning out
four times the number of engineering doctorates as the U.S.
[The prepared statement of David M. Lampton follows:]
Statement Submitted by David M. Lampton
Madam chairman and committee members: You have asked me to address
two profoundly important questions: ``What are the security, economic,
and diplomatic implications of China's rise for America?'' And, ``What
U.S. policies are appropriate in light of those implications?''
China's rise has implications for:
America's competitiveness: In the 1990s we seemed to have
the notion that ``globalization'' was something that we did to
others requiring them to reform. Americans have to get used to
the notion that globalization also requires us to reform.
Asia's security structures: The post-World War II East Asian
security structure, the ``hub and spokes'' system, is
undergoing gradual and uneven change. U.S. allies are
rebalancing their interests with America against their
expanding interests ins and concerns about, a growing China.
The United States' diplomatic toolbox and the mix of power:
There are three kinds of power--coercive, economic, and idea
power. It is tempting to become fixated with the military.
dimensions of China's rise, but it is the economic and
intellectual dimensions that likely will be most important.
China is leading with its growing economic and intellectual/
cultural power in the region. America must rediscover and-
utilize its own economic, cultural, and intellectual power
(soft power) assets in East Asia.
China's rise need not be at America's expense, even though we must
be prepared for downside possibilities. If China's rise can push
America to make the internal and external policy and behavior
adjustments we should make (out of consideration of our own interests),
the United States will be stronger for this productive competition,
East Asia will become more stable, and we will have a more prosperous
and effective partner in addressing the region's humanitarian and
developmental problems. Was China to move in less welcome directions
and the United States to fail to make the needed changes, future
prospects would be much more somber.
UNCERTAINTIES AND THE DIMENSIONS OF CHINA'S GROWTH AND CHANGE
The People's Republic of China (PRC) is the largest, most rapidly
changing international actor on the world stage today. It is traversing
enormous tracts of previously uncharted social, political, economic,
and diplomatic real estate. Never before has such a large economy moved
so rapidly from a planned structure toward market operation; opened up
so speedily to the world financial and trade system; changed so
dramatically from a rural to increasingly urban society; switched from
energy self-sufficiency to import-dependence so quickly; and, gone from
an information-starved to information-rich status so abruptly, the many
controls on the Internet notwithstanding.\1\ Given the magnitude of
these changes, it is impossible to anticipate all the conceivable
outcomes. A lot could go wrong in China, not the least being a rigid
political system crumbling under the accumulated forces unleashed by
reforms. Simply projecting past trends and successes indefinitely into
the future is risky, indeed destined to be wrong along some important
dimensions. If nothing else, as China's economy enlarges and exhausts
the relatively ``easy'' gains that have produced spectacular growth
thus far, the rate of economic expansion can be expected to slow. The
straight-line projection of Japan's spectacular economic performance of
the 1980s into the indefinite future is a cautionary tale.
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\1\ Michael Chase and James Mulvenon, You've Got Dissent: Chinese
Dissident Use of the Internet and Beijing's Counter Strategics (Santa
Monica: RAND Corporation, 2002).
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Uncertainties aside, America must plan for a future in which China
continues to make progress across a broad front. The dimensions of the
PRC's emergence are everywhere apparent and the list below simply is
suggestive:
China's military modernization still faces enormous
challenges, but the progress to date has exceeded expectations
of a decade or so ago. We see this in China's space program,
its downsizing and professionalization of forces, its shift
toward naval, air, and missile capabilities, and in its
evolving force-use doctrines.
The PRC's GDP growth has been in excess of 9 percent on
average since 1990, after having averaged above 10 percent in
the 1980s, according to the world Bank. India, by way of
contrast, had growth rates a little more than fifty percent of
China's throughout the 1980s and 1990s.\2\
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\2\ The World Bank, World Development Indicators (Washington, DC:
The World Bank, 2004), pp. 182-183.
China's imports and exports have grown eight times as fast
as world trade in the 1980-2003 period according to the IMF. In
1978, China's turnover trade accounted for .8 percent of world
trade; by last year it accounted for 6.4 percent. Cumulative
foreign direct investment in China has gone from negligible in
1982 to $500 billion (2003), taking off in the early 1990s.
There is a downside here for China, inasmuch as a large share
of PRC exports (55 percent in 2003) comes from foreign-invested
enterprises. This means that many of China's wholly owned-
domestic firms still are far from competitive internationally,
though a few firms have emerged such as Huawei telecom and
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Haier appliances.
China also is becoming a growing supplier of capital,
particularly in Southeast Asia, as well as in the United
States, Latin America, and elsewhere. The PRC's foreign
exchange reserves (minus gold) were about $659.1 billion in
March 2005 and the PRC held $174.6 billion in U.S. Treasury
securities, second only to Japan ($715.2 billion) in October
2004.
In 1993, of China's total exports, 17.7 percent were
machinery and electrical products; by 2003, 51.9 percent were
in this category. The U.S. Census Bureau reports that in 2002
for the first time the U.S. trade balance in advanced
technology products went negative, though we must acknowledge
what constitutes ``advanced'' products is a broad category that
includes items of comparatively modest technology.
Since 2002, Japan, South Korea, and Taiwan have seen China
become their number one export destination, replacing the
United States, though this hides the fact that America remains
a primary destination for intermediate goods sent to China,
assembled there, and then exported.
Intellectually, growing numbers of foreign students
throughout Asia are studying in China. And, China's own
students are achieving more internationally. In April of this
year, ``[T]he University of Illinois tied for 17th in the world
finals of the Association for Computing Machinery International
Collegiate Programming Contest.'' \3\ Shanghai Jiaotong
University took first place.
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\3\ Thomas L. Friedman, ``Soon, Just Showing Up Won't Even Take the
Bronze,'' International Herald Tribune, May 14-15, 2005, p. 4.
The OECD reports that Chinese R & D expenditures are growing
rapidly now, from a low base, and a Stimson Center study by
Kathleen Walsh\4\ reports on the growing number of foreign R &
D facilities locating in China.
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\4\ Kathleen Walsh, Foreign High-Tech R&D in China (Washington, DC:
The Stimson Center, 2003).
In short, America should plan on dealing with an increasingly
capable China in the military, economic, intellectual, and cultural
realms. The United States should not go into the defensive crouch of
containment-like thinking. Instead, we must think seriously about how
to cooperate and compete more effectively, and play a central role in
the emergence of new patterns of economic, intellectual, and security
interaction.
THE BUILDING BLOCKS OF NATIONAL COMPETITIVENESS
The PRC is becoming an increasingly able competitor on the global
playing field America did so much to build. China wants to play ball
with America. The question is: ``Will America perform well in a game
and on a field it long dominated?''
The building blocks of national power and competitiveness are
national investment and savings; education; health; energy; and sound,
legitimate governance. Though China has significant problems in each
area, it is doing comparatively well in the first three--and less well
in energy and legitimate governance.
In 2003, the Chinese had an investment to GDP ratio between 32
percent and 42 percent. Looking at domestic savings alone, the IMF says
China's ``gross national savings'' rate that year was 47.6 percent.
These rates make continued high economic growth very likely.
Chinese performance contrasts sharply with America's. Harvard's
Larry Summers was right when he said:
In the last year [2003], the net savings rate of the United
States has been between 1 and 2 percent . . . It represents the
lowest net national savings rate in American history . . . In
fact, net investment has declined over the last four to five
years in the United States, suggesting that all of the
deterioration of the current account deficit can be attributed
to reduced savings and increased consumption rather than to
increased investment.
The United States cannot long compete when it borrows for current
consumption while China invests using its own savings. America must
rebalance its saving, investment, and consumption priorities. If we do,
Beijing's competition will have done us a big favor. Such action would
help us resolve our twin budgetary and trade deficits.
Examine the second building block--education. U.S. higher education
is excellent. Nonetheless, considering its low current income levels,
and the many severe education problems in China's rural areas, the PRC
has brought primary school education to 93 percent of the nation's
population; the percentage of secondary school-age children enrolled
has risen rapidly in the last decade; and the percentage of China's
population in tertiary education has more than quadrupled since 1991/
92. Many people say China is attracting foreign manufacturing
investment because of cheap labor. In fact, the attraction is the
combination of relatively inexpensive and relatively skilled labor,
though we ought not to forget the millions of educationally deprived in
rural areas.
Take as an example a field that is highly germane to economic
modernization--engineering. China and the United States in 2002 granted
approximately equal numbers of graduate-level engineering degrees,
though China granted almost 3.5 times as many undergraduate engineering
degrees. Moreover, U.S. engineering schools have substantial
enrollments of non-citizen students. More startling, entering class
sizes in engineering schools in China are growing rapidly. Looking to
the future, and even discounting for quality differences, China will
have enormous and growing human resources in technology. The National
Science Foundation predicts that by 2010 China could well be turning
out about four times the number of engineering doctorates as the United
States.\5\
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\5\ Data cited by Ernest Preeg, ``The Emerging Chinese Advanced
Technology Superstate,'' presentation at The American Enterprise
Institute, May 13, 2005.
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Go to most U.S. graduate schools in the hard sciences and you will
see highly capable students from China in profusion. And, while the
number of Americans studying in the PRC is in the low thousands each
year, China for well over a decade has had about 60,000 students
matriculated in American institutions of higher learning studying
science, technology, as well as business, economics, and international
affairs. China is turning out language proficient, culturally adept,
and scientifically and technically capable people at home and abroad in
ever-greater numbers. We must do the same thing. If Chinese competition
motivates us to do what we should be doing, this is positive.
Public health is a tricky third building block. There are millions
of people in China with virtually no medical care, the system is
vulnerable to infectious diseases as the world saw with SARS in 2002-
2003, and maladies once reduced to very low levels are increasing in
incidence--not to mention a looming HIV/AIDS catastrophe. Nonetheless,
China had a life expectancy in 2002 of 71 years, which compares
favorably with the life expectancy in a much richer United States--77
according to the World Bank. And yet, in 2002 China only consumed about
5.5 percent of its still modest GNP on health expenditures while the
United States consumed 13.3 percent by 2004, this figure had risen to
15.4 percent and the rate projected for 2014 is a whopping 18.7
percent. The point is not that Americans should prefer Chinese health
care, but rather that if the United States is to remain competitive it
must control health expenditures. Germany, France, and the UK each have
longer life expectancy rates than the United States, and they have
about half the per capita health costs of America according to OECD
data. The U.S. Bureau of Economic Analysis reports that ``Before the
first energy shock [1973], Americans, spent $1.56 on health care for
every dollar they spent on energy . . . Now, even with oil prices up,
every dollar spent on energy is matched by $3.81 on health care.'' \6\
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\6\ Floyd Norris, ``Compared with Health Costs, Energy is Cheap,''
International Herald Tribune, May 14-15, 2005, p. 12.
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And this brings us to energy policy, about which little need be
said, other than the United States needs to get away from excessive
reliance on imported petroleum and unstable regions of the world.
Whatever nation first escapes the petroleum trap will achieve economic
dominance for the next era; indeed, such liberation would define a new
era. China is becoming rapidly energy-import dependent and this
accounts for the near obsession Beijing has with securing sources of
energy supply irrespective of the attributes of the supplying regimes.
Energy is one of the . principal Achilles heels of the PRC--along with
water.
THE CHALLENGE OF BUILDING NEW SECURITY STRUCTURES IN ASIA
Turning to the security implications of China's rise, the trends
merit vigilance. China's official, non-inflation adjusted defense
budget has increased in the double-digit range every year from 1990
through 2004. Most outside estimates place China's military
expenditures in a league with Russia, Japan, and the: UnitedSecond,
China has an active, space program, the dimensions of which would
surprise most Americans, and emphasis is on modernizing air, missile,
and naval forces, as well as enhancing cyberspace, communication,
guidance, and reconnaissance capabilities. Beijing is developing these
forces and capabilities to have military options if it determines
Taiwan is moving unalterably toward independence; to deter Washington
from entering a Taiwan Strait conflict; to safeguard China's nuclear
deterrent; and to secure its resource lifelines: There is a non-trivial
chance that Washington and Beijing could end up in conflict in the
Taiwan Strait if the situation there is not handled well. Since early
this year, however, there have been positive developments in cross-
Strait relations--we must watch carefully and actively encourage
positive moves.
Beyond Taiwan, however, the U.S. security situation in Asia is
changing less as a consequence of China's growing military power than
its economic growth. America's post-World War II allies in East Asia
(Japan, the Republic of Korea [ROK], Australia, Philippines, and
Thailand) increasingly depend on exporting to China and/or receiving
increasing investment from it. Consequently, most U.S. allies will not
allow themselves to be drawn into what they view as unnecessary
friction with Beijing. Japan is the ally most tightly aligned with
Washington. As China's economic power grows, the United States can
decreasingly count on allies marching in lockstep. In some cases, such
as the ROK, that day already is gone. The amorous effects on U.S.
allies of China's economic aphrodisiac are nowhere more apparent than
in NATO's contemplating arms sales to China in the face of Washington's
opposition.
China's rise, therefore, is forcing many of our traditional allies
in the region and farther afield increasingly to balance their
interests with Beijing against their interests with Washington. Most
Asian countries do not wish to be forced to choose between the two. As
China becomes a bigger security and economic player, and if it
continues with its trade and smile diplomacy, alliances that initially
were directed against the PRC, and more recently designed to maintain
balance and reassurance in the region, will become progressively less
effective unless they adapt.
Institutions need to be developed that incorporate China into the
Asian structure of peace. America needs to take the lead in. developing
this structure. The most critical strategic challenge in this respect
is how to foster security cooperation between China, Japan, and the
United States, a structure not premised on a ``two-against-one''
triangular logic that inevitably has one party feeling left out and
vulnerable. No major regional challenge in Asia can be effectively
addressed without cooperation among Beijing, Tokyo, and Washington. The
recent surge in Japanese and Chinese nationalism and Chinese hostility
directed at Tokyo signal the dangers.
THE IMPLICATIONS FOR AMERICAN DIPLOMACY AND THE MIX OF POWER USED
Presidents Bush and Hu Jintao both traveled to Australia in late
2003 and it is widely asserted that China's president was more warmly
received by our ally's legislature than our president, reflecting the
success Beijing has had in its dollar and smile diplomacy, the most
notable features of which were signing two energy deals with Canberra
each of which ranged well over fifteen billion dollars. China also is
seeking to reduce tensions in the region by shelving most territorial
issues, signing agreements to reassure neighbors, promoting free-trade
agreements, engaging in military-to-military exchanges, establishing
large and long-term investment relationships, and promoting its ``early
harvest initiative'' that promises some agricultural producers in the
region more favorable access to China's domestic market. Beijing is
doing the latter to win support on Taiwan as well. This tightly
coordinated diplomatic and economic strategy in the region is leading
serious analysts of the East and Southeast Asian system to talk about a
``power shift,'' though Asia is by no means sinocentric.\7\
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\7\ See, for example, David Shambaugh, ed., Power Shift: China and
Asia's New Dynamics (forthcoming, University of California Press,
2005).
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The United States needs to react more effectively to these
developments and possesses enormous resources to do so if it employs
the appropriate mix of economic, intellectual and cultural, and
military power. Washington has talked too much about military issues
and done too little on the economic and cultural/educational fronts.
This problem began under the Clinton administration when Washington
reacted too feebly to the Asian Financial Crisis. Nonetheless, the
United Staten still is more trusted to be an honest broker, and power
balancer, than anyone else in the region. Moreover, Americais still the
most important ``end market'' for most everyone in the region.
Washington needs to be more active in multilateral diplomacy in the
region and more active in expressing interest in multilateral free-
trade possibilities.
China's integration into vital regional and global production
chains has an important implication for the use of economic sanctions.
For many Chinese exports the value added in the PRC is 30 percent or
less, meaning that 70 or more percent of the value is added in other
countries or regions, most of which are friendly to us. To inflict
sanctions against nominally ``Chinese exports,'' therefore, is to
inflict the bulk of the pain on others. This is bad economics and bad
international politics.
POLICY IMPLICATIONS FOR THE UNITED STATES
Americans believe in competition; China's emergence is providing
it. There are two categories of policy responses--those involving
fundamental American domestic systems and those that more directly
pertain to relations with China and East Asia.
(1) China's rise forces Americans to reexamine fundamental systems in
the United States, challenges we ought to address even if China were
not in the picture. The issue is, ``Are we going to be competitive?''
If so, we need to:
(A) Increase our national savings rate. The solutions to our
trade and budget deficits do not principally rest in Beijing,
they lie principally in Washington. It may be emotionally
satisfying to rail against foreigners, but this alone will not
be economically effective. Having said this, Beijing now should
modestly revalue the RMB out of its own, as well as U.S.,
interests (more below).
(B) Improve our schools--increase math and science training.
Bill Gates has noted our high schools are broken overall, and
one needs only look at foreign student enrollments in higher
education science and technology programs in the United States
to know that we are not producing sufficient numbers of our own
citizens proficient in the hard, mathematical, and engineering
sciences. As Gates put it in recent remarks:
By obsolete, I do not just mean that our high schools are
broken, flawed, and under-funded--though a case could be made
for every one of those points. By obsolete, I mean that our
high schools even when they are working exactly as-designed--
cannot teach our kids what they need to know today.\8\
---------------------------------------------------------------------------
\8\ Bill Gates, ``Remarks to National Education Summit on High
Schools,'' www.gatesfoundation.org (accessed May 15, 2005), remarks
delivered February 26, 2005.
(C) Get more of our students into first-rate language and
area studies programs and put the same emphasis on being
effective with other peoples that the Chinese do. Mainstream
social science departments in major U.S. research universities
have lost interest in area studies--this is a national security
issue and should be taken as seriously in the 21st century as
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it was in the second half of the twentieth.
(D) Find a way to stop the steady increase of health
expenditures as a percentage of GDP. The American auto
industry, for example, cannot be competitive when its overhead
includes $1,525 of health costs on each car rolling off the
assembly line as is the case at GM.\9\ And be assured, China is
emerging as an international competitor in this most American
of industries.
---------------------------------------------------------------------------
\9\ Katie Merx, ``Widening Burden: GM Confirms that Cost of Health
Care is a Crisis,'' Detroit Free Press, April 20, 2005.
(E) Reduce U.S. dependence on external supplies of energy,
contain costs, and decrease negative environmental consequences
---------------------------------------------------------------------------
of energy use.
These are alterations that the United States can and must make--
they do not particularly depend on Beijing's cooperation but will have
great bearing on how effective we are in competing with the PRC. If we
fail to do these things, even effectively pushing Beijing to alter its
unhelpful practices (which we should do) will only marginally improve
things.
(2) With respect to regional/bilateral policies, many things should
be done:
(A) Because U.S. competitiveness relies on innovation, and
this depends on protecting intellectual property (IPR), my
first priority with respect to economic/trade policy is IPR
protection. I recently was in China with a group of your fellow
senators and representatives and had a hard time finding any
genuine foreign goods for sale by small vendors. I note that in
recent congressional testimony Charles W. Freeman III,
Assistant USTR, said that: ``The administration places the
highest priority on stemming the tide of intellectual property
rights infringement in China.'' \10\ I agree.
---------------------------------------------------------------------------
\10\ Charles W. Freeman III; ``Testimony Before the Committee on
Government Reform,'' May 13, 2005.
(B) With respect to RMB valuation and exchange rate issues,
we must distinguish between a flexible exchange rate system and
a one-time revaluation. The former should be our longer-term
goal, but a modest upward revaluation of the RMB now is
warranted. This would assist the global monetary system in
appropriately realigning exchange rates and help Beijing manage
its current inflationary pressures. However, I doubt that any
feasible (likely) Chinese revaluation would have great impact
on the bilateral trade deficit and pushing precipitously for a
fully market-driven exchange rate is risky given China's
---------------------------------------------------------------------------
problem-plagued banking sector.
(C) Washington should develop a means by which the United
States, China, and Japan regularly consult about security
concerns. The idea is to have, ``three-two talks'' once or
twice annually. These would be discussions where cabinet or
higher-level security and diplomatic officers of the three
governments get together to exchange views on common concerns.
Such talks might evolve into something more formal, though we
have the problem that Beijing may view such interactions as two
against one as long as Washington has a bilateral alliance with
Tokyo that it feels is directed against China. With respect to
Northeast Asia, there were hopes that the Six-Party Talks might
evolve into a more formal security structure. Those prospects
seem dim now, but there is a role for five of those six parties
to consult about regional security issues and perhaps something
more formal could emerge. The main point is that bilateral
alliances, with the Cold War patina of being aimed at China,
are going to be decreasingly effective as Beijing's power and
attractiveness increase, assuming those trends persist. We must
bring China into the regional security architecture.
(D) America needs to rediscover its soft power in the region.
Washington should become more active in multilateral regional
free trade discussions, talk about a broader range of issues
than the global war on terror, and most immediately fix visa,
exchange, and related policies so that businesspersons and
students from the region have traditional access to America.
The late-1999 move of the public diplomacy function from the
stand-alone United States Information Agency to--the Department
of State was not wise inasmuch as public diplomacy suffered a
relative decline in priority given the State Department's other
responsibilities. We should increase the effectiveness and
credibility of public diplomacy and restore America as a place
people can expeditiously enter for education and business. The
2.4 percent decline in international student enrollments of
2003/4 is not in the national interest.
(E) And finally, China's rise has daunting implications for
Taiwan. Taiwan has bet its economic future on financial, trade,
and manufacturing integration with the PRC, but there are
significant forces on the island that desire independence, a
quest that basically is incompatible with the island's security
and economic needs. To maintain this fundamentally inconsistent
policy, Taipei will require increasing levels of security
commitment from Washington, the cost of which will grow as
Beijing's power increases. The security of a Taiwan that is
highly integrated into the PRC's economy cannot be maintained
by military means alone. Therefore, recent trends toward cross-
Strait economic cooperation, cultural exchange, and political
dialogue are logical, desirable, and to be encouraged. Getting
back to a situation of cross-Strait dialogue that proved
productive from 1992 until later in the 1990s should be a
priority U.S. goal. For, if the Taiwan Strait were to erupt
into conflict, our hopes for a pacific, Pacific region would be
grievously set back.
Senator Murkowski. Since the attacks of September 11, many
foreign students have found it more difficult to get a visa to
study in the United States, so with substantial non-citizens in
our engineering schools and fewer foreign students entering the
U.S., keeping the U.S. competitive in the world marketplace is
more than just about tariffs and foreign policy; it is also
about developing future generations of Americans to be
competitive with their foreign counterparts.
In taking stock of all these issues, what we must not do is
act in such haste that we act irresponsibly. We must keep in
mind the lessons of the December tsunami. The United States'
rapid humanitarian response and use of our military assets in
the region generated a considerable amount of goodwill. Locals
took note that despite China's increasing investment and
activities in their countries, when disaster struck, the U.S.
was the only country able to actually provide the muscle behind
the response. It is a reminder, albeit not the way you want a
reminder to happen, that even as we are looking at China's
rapid expansion, they do not yet have the ability to be a
superpower. They are well on their way, but they are not there
yet.
The United States still holds plenty of cards in our hand.
How we play those cards, however, will determine our future
involvement in Asia. I do look forward to hearing from each of
our witnesses as to your suggestions on how the United States
should move forward, what policy changes need to occur, and
what role we, in the Congress, can play in the process.
I would like to recognize my colleague, Senator Obama, and
ask if you would care to enter any opening comments. And thank
you for joining us this afternoon.
STATEMENT OF HON. BARACK OBAMA,
U.S. SENATOR FROM ILLINOIS
Senator Obama. Absolutely. Thank you very much, Madam
Chairwoman.
I appreciate, Mr. Hill, you taking the time to be here.
Thank you so much. Because I am sure that everybody's time is
limited, I will just keep my remarks brief.
Obviously, part of what prompted this hearing this
afternoon is the concern about ongoing economic relationships
between China and the United States. I will be interested in
hearing some of your perspectives, in terms of potential
competition--hopefully, friendly competition--between the two
nations when it comes to energy policy and how we are having an
impact on trade agreements, not only in Asia, but also in
places like Latin America. I am, obviously, curious, also,
given just some of the recent reports coming out, about China's
relationship with North Korea. I probably will, maybe, pose
just a couple of brief questions, since that is obviously on
our minds in the news.
Thank you.
Senator Murkowski. Thank you.
And right on time, Senator Feingold, would you care to give
any opening comments this afternoon?
Senator Feingold. No, thank you. And I look forward to the
question period.
Senator Murkowski. You bet. Great.
With that, Mr. Hill, if you could please share your
comments with us? And, again, welcome.
STATEMENT OF CHRISTOPHER HILL, ASSISTANT SECRETARY FOR EAST
ASIA AND THE PACIFIC, DEPARTMENT OF STATE
Ambassador Hill. Thank you very much, Madam Chairwoman.
I have a report, a statement, that I would like to enter in
the record, and then read a short excerpt from it, and then go
right to your questions.
Senator Murkowski. Your entire comments will be included
in the record.
Ambassador Hill. Thank you very much.
Madam Chairwoman, Members of the Subcommittee on East Asia
and Pacific Affairs, I am pleased to appear before you this
afternoon to discuss China's emergence in the Asia-Pacific
region and the challenge and opportunity this presents the
United States and its allies and friends in the future.
One of the most important foreign policy goals of seven
American Presidents over 30 years has been to engage China in a
way that helps it peacefully integrate into the international
system. As the Secretary of State said on a March 19th speech
in Tokyo, the United States welcomes the rise of a confident,
peaceful, and prosperous China, and wants China as a global
partner, but one that is able and willing to match its growing
capabilities to its international responsibilities. We also
seek a China that is moving toward greater openness and rule of
law at home, though it clearly has a long way to go.
How China changes depends mostly on its own people, but how
we and others interact with it will shape the environment in
which China makes its choices. Our policy will be based on a
realistic appraisal of our common interests and our
differences. Our continued active engagement in the Asia
Pacific region and around the world is vital. I can assure you
that America is working hard today on all of its trans-pacific
relations. The future of the Asia Pacific will depend on a
strong and committed America.
The President said, on May 30, that our relationship with
China is complex. In recent years, we have worked hard to
address common challenges--regional and global and economic and
political--with China. We do have differences with China on
many important issues--human rights, nonproliferation, Taiwan,
and, most prominently in the press recently, intellectual
property rights, textiles, and currency. We have to handle
these issues sensitively, but in ways that advance our values
and our national interests.
We discern two major trends in China's emergence in the
Asia-Pacific region. First and foremost is the development of a
robust trade and investment relationship which fuels China's
own domestic development. Second, China is clearly interested
in matching its economic power with political influence and,
thereby, giving it an opportunity to help shape the region and
its own interests.
A brief look at China's trade and investment with Asia, on
which I have provided more details in my prepared statement,
illustrates why the PRC is already, rather than becoming, a
major regional player. China's trade with ASEAN grew over 30
percent last year. In North Asia, China is now the leading
trade partner of both Japan and Korea. China also recently
became one of the largest investors in Indonesia, buying oil
and gas interests.
Nonetheless, U.S. trade and investment in the region
remains robust, and is distinct from what China has to offer.
China exports primarily consumer goods that, for the most part,
do not compete directly with U.S. products like high-tech
knowledge-based goods, services, and agricultural products. The
U.S. has invested over $85 billion in ASEAN; whereas, Chinese
investments are less than two billion. And Asia needs and
values our markets and our expertise for its own continued
development.
China's size and growing economic links in the region
ensure that its influence will grow in the years to come. But,
as I said earlier, America's role in Asia has increased, not
diminished, through our strong alliance with Japan, Australia,
South Korea, Thailand, and the Philippines; thoughtful changes
in our global force posture; extensive engagement in regional
architecture, such as the ASEAN Regional Forum and the Asia
Pacific Economic Cooperation Organization; and our own open and
transparent markets.
Let me comment briefly on the impact of China's
relationships with Taiwan, North Korea, and Japan on regional
security issues.
In Taiwan, the anti-secession law, which China passed last
March, including a statement that it would not renounce the use
of non-peaceful means in its policy toward Taiwan, was
unhelpful and, in our view, a step back from the kind of
dialogue that would lead to a peaceful resolution of
differences. The longstanding U.S. position based on our one-
China policy and commitments under the joint communiques and
the Taiwan Relations Act, has been that cross-Strait
differences must be resolved in a way that is acceptable to the
people on both sides of the Strait. To that end, the United
States Government strongly encourages cross-Strait dialogue of
all forms. While Taiwan's opposition parties' leaders' recent
trips to Beijing have the potential to be helpful, it is
crucial, really, that China take the important next step of
reaching out to duly elected representatives on Taiwan.
In North Korea, China has been very supportive of the six-
party process in its role as host of the talks. China has made
clear, at the highest levels, that it shares our goal of a
Korean Peninsula free of nuclear weapons. China has the closest
relationship with North Korea of any of the six parties, and it
is for this reason that we continue to believe that the Chinese
leadership has the kind of leverage that can help make a non-
nuclear Korean Peninsula a reality. It is incumbent on each of
the parties, particularly China, to make very clear to North
Korea that the time has come for it to return to the talks in a
way that demonstrates that it is ready to make a strategic
choice about its future.
In Japan--America has few stronger allies in the world than
Japan; and, throughout this administration, we have worked hard
to develop common approaches to global and regional problems.
Thus, the unresolved tensions between China and Japan,
exacerbated by diverging political and historical perspectives
and differing military and economic priorities, disrupt a
relationship of great importance to the region. Healthy China/
Japan relations are essential to stability and prosperity in
East Asia.
I will conclude with two observations. First, China's
global emergence is a natural consequence of its economic
growth and development, and need not occur at the expense of
the United States. We are, as I said--and we will remain--a
Pacific power by virtue of our shared values, economic ties,
and defense relationships with many of the countries in the
region. I assure you that a strong, secure United States and a
strong, secure, prosperous, and stable Asia Pacific remain our
goal, and a continuing reality.
Second, we must work with China, and with all our partners,
to ensure that its emergence takes place within strong regional
and global security, economic, and political arrangements. I
believe that this will be one of the key objectives of our new
China/U.S. dialogue to be held soon to be led, on our side, by
Deputy Secretary Bob Zoellick.
With that, Madam Chairman, I would be pleased to take any
and all of your questions.
Thank you very much.
[The prepared statement of Ambassador Hill follows:]
Prepared Statement of Christopher R. Hill
Madame Chairman, members of the Subcommittee on East Asian and
Pacific Affairs, I am pleased to appear before you this afternoon to
discuss a topic that has engaged policymakers, legislators, academics
and citizens alike for the past quarter of a century--China's growing
influence in Asia. Dealing with China's emergence--its economic and
political development, its engagement in a rules-based international
world, its evolution as a major military presence in the region--will
be a key challenge and an important opportunity for the United States
and its allies and friends and over the next quarter of a century and
beyond.
GETTING OUR RELATIONSHIP WITH CHINA ``RIGHT''
For three decades, seven administrations have sought to integrate
China and its people into the international system. We have succeeded
in developing a bipartisan policy that has met with considerable
success since 1972. Today's challenge is different from thirty years
ago: the key question is how a more integrated and powerful China uses
its growing influence and whether it will do so in concert with the
United States and its allies. Will it accept the challenge of the
international community to help enhance the peace, prosperity and
stability of the region and in doing so, positively change the
international system as we know it today. As Secretary of State Rice
said in a March 19 speech in Tokyo, the U.S. ``welcomes the rise of a
confident, peaceful and prosperous China . . . [and wants] China as a
global partner,'' but one that is ``able and willing to match its
growing capabilities to its international responsibilities.''
We also seek a China that is moving toward greater openness and
rule of law at home, though it clearly has a long way to go. How China
changes depends mostly on the people of China, but how others and we
interact with it will have an impact on the environment in which China
makes its choices.
To further integrate China into regional and global security,
economic, and political arrangements will require us to maintain active
U.S. engagement in the Asia-Pacific region and around the world.
Remaining a steadfast partner to our allies and friends in the region
is a fundamental tenet of American foreign policy.
Getting our relationship with China ``right'' is vitally important.
A decade ago, we all wanted China to be more actively involved in
regional and global affairs. We wanted China to engage with Taiwan in a
dialogue that would lead to the peaceful resolution of outstanding
differences acceptable to the people on both sides of the Strait. And
we wanted it to open its market of 1.3 billion people to U.S. goods and
services.
We have achieved much of what we asked for on the latter: China is
a member of the World Trade Organization, it is the world's third
largest trader after the U.S. and Germany, and it is investing around
the globe in Asia, Africa and the Western Hemisphere. Among our tasks
now--and one we share with our allies and friends--is to ensure that in
its search for resources and commodities to gird its economic
machinery, China does not underwrite the continuation of regimes that
pursue policies seeking to undermine rather than sustain the security
and stability of the international community. We also want to ensure
that China joins our efforts in the WTO to lower barriers to world
trade; in short, that it cooperates across-the-board with the United
States in ways appropriate to the first new great power of the 21st
century.
U.S.-CHINA TIES NOT A ZERO-SUM GAME
China's success in extending its political influence in the Asia-
Pacific region and throughout the developing world is, in my view, a
logical evolution, closely tied to its emerging economic clout, and
certainly is not a zero-sum game for the United States. Nor should
China see our continuing pursuit of U.S. national and security
interests in the region as a threat or a loss to them. I believe that
China well understands that we are an Asia-Pacific power and that other
members of the Asia-Pacific community--and here I would say China
included--look to the U.S. market, U.S. investment, U.S. technical
expertise, and to our open and vibrant society. And for the sixty years
since the end of World War II, the Asia-Pacific community has looked to
U.S. military forces in the region as a guarantor of peace and
stability.
There is much that is complementary with China in our approach to
the region and much on which we look forward to cooperating with them.
As the President said on May 31, our relationship with China is
complex, but at least in recent years we have been able to communicate
often--in remarkably candid and direct fashion, when necessary--and to
address common challenges--regional and global, economic and political.
Of course, we do have differences with China on a variety of important
issues, including human rights, non-proliferation, Taiwan, and some
aspects of trade and finance, among others. We seek to ensure that our
differences do not preclude cooperation in areas where we agree. All of
these issues must be handled sensitively, but in ways that advance our
values and national interests. Let me say again that we intend for our
relationship with China to be based on a realistic appraisal of our
common interests and the exploration of differences through dialogue.
THE ECONOMIC DIMENSION OF U.S.-CHINA RELATIONS
Let me turn to the economic side of China's emergence and
especially how that affects the United States. China's WTO accession in
2001 was a remarkable event. Its implementation of its commitments has
created many opportunities for U.S. firms and exporters. U.S. exports
to China have grown by 80 percent since accession, while total global
U.S. exports grew just 11 percent during that same time. Nonetheless,
serious problems abound in a variety of areas, from ineffective
enforcement of intellectual property rights and barriers to
distribution of products, to non-tariff barriers in agriculture
(including a ban on U.S. beef) and a dramatic surge in textiles with
the termination of the quantitative restrictions allowed by the WTO
Agreement on Textiles and Clothing.
We expect China to fully and effectively implement all of its WTO
commitments and to take action on key trade and economic concerns to
further open its market and eliminate distortions. We are determined to
see change and have made that clear to the highest levels of the
Chinese government. A number of these issues will be discussed at the
Joint Commission on Commerce and Trade this summer. At the same time,
extreme protectionism is not the answer. We need to find solutions that
do not derail our broad, long-term commitment to free and fair trade. I
believe the countries of the Asia-Pacific region share many of these
same concerns about maintaining open markets and insisting on fair,
rules-based trade.
Protection and enforcement of intellectual property rights (IPR) in
particular remains a vexing problem and a top priority our trade
relationship with China. If China does not provide effective
enforcement of IPR, it will undermine the development of knowledge
industries and innovation around the world. Piracy and counterfeiting
in China are rampant. If we can make it, they can fake it. The items
being pirated and counterfeited range far beyond DVDs and other
creative media. They include automobile brakes, even entire passenger
cars, electrical switches, medicines, marine pumps, processed foods and
other items that create health and safety risks in China and abroad
because of poor product quality regulation. The scope and magnitude of
the problem is huge and increasing--some American firms experience
wholesale theft of product lines. Premier Wen Jiabao, Vice Premier Wu
Yi, and others have spoken of the importance of IPR to an advancing
economy and of the need to enforce IPR more actively. Yet, piracy and
counterfeiting rates are as high as ever. We need to see a substantial
reduction in IPR infringement in China; that is the real measure.
As a result of USTR's Special 301 determination and out-of-cycle
review of China's IPR regime, we are taking a number of actions,
including considering using WTO procedures to ensure China's compliance
with its obligations, invoking transparency provisions within the WTO
to request that China produce detailed information about its
enforcement activities, and using the JCCT to secure new, specific
commitments to significantly improve IPR protection and the enforcement
environment in China.
We are also urging China to take a responsible role with regard to
its exchange rate policy. As Treasury Secretary Snow noted in his most
recent report, China's current exchange rate policy is ``highly
distortionary,'' and poses risks to the Chinese economy and global
economic growth. The Chinese leadership has committed to adopting a
more flexible, market-oriented exchange rate regime; we believe the
time is right for them to do so.
China's leaders say they do not want economic and trade frictions
to spill over into other aspects of our growing relationship. That will
only be the case if we hold firm to our insistence on China's
fulfilling the obligations it took on when it joined the WTO and the
commitments it has made in bilateral and multilateral discussions since
then.
CHINA IN THE ASIA-PACIFIC
There are two main drivers behind China's emergence in Asia: a
dynamic view of how trade and investment fuels its own domestic
development; and a desire to match its growing economic weight with
political influence to allow China to help shape the regional system to
its advantage, where possible.
Trade and Investment
The ability to bring economic growth and prosperity to its citizens
is a key function that defines the legitimacy of any government; in
recent years, as China has gone from a strict command economy to one in
which market forces have played an increasing role, China's leadership
has been successful in reducing poverty and delivering a better way of
life for the majority of its citizens. The economy has grown an
astounding 9 percent per year for the past 25 years; of course, this
growth is coming from a very low base. China's economic orientation
remains largely domestic--focusing on domestic investment,
infrastructure development, and renewal--as the country tries to create
the equivalent of 2 million new jobs a month for a growing workforce.
However, a significant part of China's economic growth now depends on
its outreach to the Asia-Pacific region and to the rest of the world to
secure inputs, especially raw materials and commodities and energy, and
markets. This growth has inevitably meant increasing global engagement
and expansion of China's national interests.
At this point, China's growing demand for resource inputs has
contributed to sometimes significant price increases on world markets,
but does not appear to have distorted international markets and caused
physical shortages or debilitating price spikes, and China is working
with international bodies such as the International Energy Agency on
management best practices. The biggest impact on U.S. national
interests is China's willingness to invest in and trade with problem
states (Iran, Sudan, Burma). We are concerned that China's needs for
energy and other resources could make China an obstacle to U.S. and
international efforts to enforce norms of acceptable behavior and
encourage China's participation in international organizations to
counter this tendency.
China's most dramatic diplomatic, political and economic gains of
the past few years have been in Southeast Asia. Two years ago China
signed the ASEAN Treaty of Amity and Cooperation and last year it took
steps to complete the China-ASEAN Free Trade Agreement. Following an
initial lackluster response to the tragic tsunami in South and
Southeast Asia last December, China, like the United States, gained a
large measure of regional goodwill by offering considerable government
and public aid, and providing medical teams to help in hospitals and
displaced persons camps.
China has become one of the largest traders and investors with many
Asian countries. Trade with ASEAN nations grew over 30 percent and
surpassed $100 billion dollars in 2004. China became South Korea's top
trading partner in 2004: their two-way trade China grew nearly 40
percent last year to US$ 79 billion. China also became Japan's largest
merchandise trading partner last year, with total two-way trade
reaching US$ 214 billion.
Nonetheless, U.S. trade with these and other Asian nations remains
robust. U.S.-ASEAN trade tops $136 billion; U.S. two-way trade with
Korea totaled US$ 72 billion; and our two-way trade with Japan reached
$183 billion in 2004. U.S. trade and investment in the region is also
qualitatively different from what China has to offer. Our comparative
advantage remains in high-tech, research and development laden, goods,
services and agricultural products. China exports primarily consumer
goods that, for the most part, do not compete directly with U.S.
products.
China is not just trading; it is also investing in the region.
China recently became one of the largest investors in Indonesia, buying
into oil and gas interests. China's investment in Indonesia's energy
sector now exceeds US$ 1.2 billion. And China is the largest foreign
investor in some of the smaller economies in Southeast Asia; for
example, China has recently become Cambodia's largest investor. Even
so, China's outward investment pales in comparison with that of the
U.S. China's cumulative realized investments overseas totaled
approximately US$ 37 billion for all countries at the end of 2004; U.S.
direct investment abroad stands at over US$ 2 trillion. In ASEAN
countries, the U.S. has invested over US$ 85 billion; Chinese
investment does not yet reach US$ 2 billion.
China's approach to its Asian neighbors reflects recognition of its
strategic considerations. By proposing to negotiate a free trade
agreement with the ASEAN countries, China offered to share the benefits
of its economic growth--while reminding the region of its growing
reliance on China. We welcome China's willingness to expand the
benefits of growth to others.
At the same time, the United States is working to strengthen its
trade and investment ties with the region. In October, 2002, the
President announced the Enterprise for ASEAN Initiative, which offers
the prospect of Free Trade Agreements to ASEAN countries that are
committed to reform and liberalization. Under this initiative, we have
already completed an FTA with Singapore, are negotiating an FTA with
Thailand, and have strengthened our trade ties with ASEAN countries
like Malaysia, Brunei and Vietnam. We are also working together within
APEC to bring down barriers to trade and investment throughout the
region.
Political Influence
China also uses its growing trade and investment ties to achieve
its political ends, which include continuing to isolate Taiwan. China's
size and expanding economic integration ensure that its already
significant role in East Asian security calculations will become larger
in the years to come. China is a nuclear power with a large standing
army and has become more of a ``status quo'' player in Asia. Its
economic modernization increases its economic impact and enhances its
political influence. Its military modernization aims at greater
professionalism, upgraded aerial, naval and missile capabilities,
enhanced command and control functions, and a rapid-deployment
conventional force.
However, China's growing security and military relationships with
traditional U.S. Asian allies should not suggest that somehow U.S.
influence or capabilities in the region have been diminished. U.S.
policy toward Asia is anchored in our strong and enduring alliances
with Japan, Australia, South Korea, Thailand, and the Philippines,
which continue to provide unprecedented stability and prosperity in the
region, and is reinforced by friendships with others in the region. Our
allies throughout the Asia-Pacific region believe good U.S.-China
relations are important to regional peace, prosperity and stability.
Our efforts to work with China in key regional groups like the ASEAN
Regional Forum and the Asia Pacific Economic Cooperation organization
will enhance, not impair, our regional alliances, which are the primary
guarantors of security in Asia.
China's relationships with Taiwan, North Korea, and Japan deserve
mention here.
The PRC strategy on Taiwan is based on a refusal to renounce the
use of force while simultaneously encouraging economic integration by
making itself attractive to Taiwan investors. China also seeks to
leverage its economic influence with countries of the Asia-Pacific
region and beyond to generate support for the PRC's stand on Taiwan. We
saw this recently when a number of countries like Burma, Cambodia and
Laos issued statements in March welcoming China's unhelpful Anti-
secession Law.
The longstanding U.S. position, based on our one-China policy and
commitments under the joint communiques and the Taiwan Relations Act,
has been that cross-Strait differences must be resolved peacefully
through dialogue in a manner that meets the aspirations of people on
both sides of the Strait. To that end, the USG strongly encourages
cross-Strait dialogue of all forms. The anti-secession legislation
adopted by China's National People's Congress was an unfortunate and
unhelpful step that did not contribute to cross-Strait stability. Under
Secretary Burns testified before this Committee on the actions the U.S.
government took to dissuade China from pursuing the legislation and
register our disappointment upon its passage. Since then, China has
reached out to opposition figures on Taiwan, culminating in the
historic visits to Beijing by leaders of the Kuomintang (KMT) and
People First Party (PFP). We encourage any form of cross-Strait
dialogue and believe that the unofficial KMT and PFP visits have the
potential to serve as an important first step in the resumption of a
dialogue between Beijing and Taipei. It is crucial, however, that China
take the important next step of reaching out to elected representatives
on Taiwan. We believe that recently stated positions on both sides of
the Strait incorporate elements of flexibility that could form the
basis of substantive dialogue.
For the most part, China's political goals need not be viewed as
antithetical to our own. China has been very supportive of the Six-
Party process in its role as host of the talks. China has made clear on
numerous occasions at the highest levels that it shares our goal of a
Korean Peninsula free of nuclear weapons. Our main problem is a North
Korea that has boycotted the Six-Party process for almost a year. China
has the closest relationship with North Korea of any of the Six Parties
and it is for this reason that we continue to engage the Chinese
leadership on the North's lack of willingness to make a non-nuclear
Korean Peninsula a reality. It is incumbent on each of the Parties,
particularly China, to make very clear to North Korea that the time has
come for it to return to the talks in a way that demonstrates that it
is ready to make a strategic choice about its programs.
Unresolved tensions between China and Japan reemerge from time to
time, causing disruptions in the development of a relationship that is
of great importance to the region. As we witnessed recently, grievances
about Japan's wartime legacy periodically erupt in China, most recently
over changes to Japanese history textbooks that led to anti-Japanese
violence. While Japan and China are more integrated than ever on the
trade front, recent controversies over the Senkaku Islands, East China
Sea energy exploration, China's posture toward Taiwan, and China's
public opposition to Japan's bid for a permanent seat on the UN
Security Council have chilled the relationship. The recent violent
demonstrations in China against Japanese diplomatic and business
facilities only serve to prolong ill will among neighbors. Disputes
should be resolved through peaceful dialogue and discussion.
Healthy China-Japan relations are essential to stability and
prosperity in East Asia. The two nations have many common interests,
and we encourage stable relations between them and engagement on a full
range of issues. Recent senior government discussions between them were
useful, but regrettably, a much-anticipated meeting between Prime
Minister Koizumi and Vice Premier Wu Yi did not take place. We support
high-level dialogue between the two countries to work through all
concerns.
SOME FINAL OBSERVATIONS
Let me conclude with a couple of observations.
First, China's global emergence is a natural consequence of
economic growth and development.
Second, we must work with China, and with our partners around the
world, to ensure that its emergence takes place within strong regional
and global security, economic and political arrangements and I believe
that this will be one of the key objectives of the new U.S.--China
dialogue to be led by our Deputy, Bob Zoellick.
Finally, we must guard against actions that threaten to disrupt our
economic and security interests. I assure you that a strong, secure
United States and a strong, secure, prosperous and stable Asia-Pacific
remain our goal, and a continuing reality.
Senator Murkowski. Thank you, Mr. Hill. And I would also
like to welcome to the committee Senator Voinovich. Did you
have any comments that you wanted to make prior to going to the
question round?
Senator Voinovich. No, I will just wait--Madam Chairman, I
will wait until the question round.
Senator Murkowski. Great. Well, with that, we will go
ahead and begin.
I want to touch on North Korea first, because that is
something that is certainly on all of our minds. And in your
former position, I know you spent a great deal of your life
just focusing on this issue. As we recognize the economic ties
now between China and North Korea, does this increasing
investment, capital investment, just--again, that economic
relationship--does it help or hinder the Six-Party talks, and
how the U.S.'s strategy may be changed to reflect the reality
of this economic relationship?
Ambassador Hill. First of all, we have seen the reports
about the increase in the volume of trade. I would say,
however, that, in terms of the volume of trade, this is not a
major calculation for the Chinese. That is, when they look at
the six-party process, they look at the need to get a nuclear-
free Korean Peninsula. They also understand--and I can assure
you they understand at this point--the absolute importance that
we attach to this issue. Whenever we talk to the Chinese, we
talk about the North Korean problem. And we are absolutely
committed to working with China to try to deal with this.
So, to be sure, there has been a growth in trade. I am
always skeptical of some of the numbers, because it is very
difficult to tell. Some of the growth in trade has to do with
the decline in various services in North Korea. We have an
economy there that is truly in decline. Some of the trade
represents privatized trade, growing cross-border trade, people
carrying goods on their shoulders across the Yalu River. It is
really hard to say to what extent there is this trade.
Certainly, China is North Korea's major trading partner.
Certainly, North Korea depends on China every single day for
fuel and food. So, certainly China has a big influence in North
Korea. But I believe--I firmly believe, on the basis of dealing
with the Chinese--that they understand the absolute importance
of solving the problem of nuclear weapons on the Korean
Peninsula.
Senator Murkowski. Well, in recognizing that, the degree
of influence that China acknowledges that they have over North
Korea, there have been some that have suggested that China is
not using that influence to the extent necessary, or needed, to
move forward on the Six-Party Talks, and has been hesitant to
do so. Can you speak to that?
Ambassador Hill. Well, certainly we have asked the Chinese
to do more to get North Korea--not only to the talks, because
the exercise is not just getting them to the talks; it is
getting them to the talks with a willingness to give up,
permanently, their nuclear program--so, certainly we have
looked to the Chinese to do more. We expect more, because, one,
they are the host of the talks, and the talks are in Beijing,
and, secondly, it seems that China needs to use some of its
leverage. Now, we have not told it how to use its leverage,
whether it uses its political leverage, whether it makes an
important decision to use its economic leverage. But certainly
the Chinese have a lot of influence, and we are encouraging
them to use as much influence as they need to use to get North
Korea, one, to the talks, and, two, to the talks in a
willingness to give up these nuclear programs.
Senator Murkowski. Let us shift over to Japan. You make
reference to the unresolved tensions and the fact that this
has, certainly, the possibility of disrupting this
relationship. How has the tension between China and Japan
impacted the rest of the region? And what, in terms of the
United States' role in attempting to defuse the tension, is
happening now?
Ambassador Hill. Well, let me make one point, with respect
to the tension between China and Japan, on the Six-Party Talks.
That is, I am satisfied that our cooperation with the six-party
process continues, and that Japan and China are able to work
together on that common enterprise. Both countries have made
very clear they want to see a solution to this.
But certainly the tensions between China and Japan are in
no one's interests. It is not something we like to see. And, I
would argue, when you look at the extent of the economic
relationship between China and Japan, which is truly enormous,
that this is not in either of their interests, as well. So, we
are hopeful that they can resolve these issues.
You know, these are tough issues, and they do go back into
history. And history can be, obviously, a very powerful force,
and a very powerful memory for people. So, I do not mean to
make light of any of the historical issues here, but they do
need to address them, and they do need to move on.
I would make one other point, which is that when you
compare how history has been dealt with in Asia, versus how
history has been dealt with in Europe, you see that the
Europeans have been able to get some things done in that
regard, and move on in a way that--I think, those of us
concerned about the situation in Asia, we need to do what we
can to see if we can make some progress there, as well.
Senator Murkowski. Now, China has come out opposed to
Japan's proposal to increase the U.N. Security Council by ten
members. And instead of permanent members, they would like to
see only non-permanent members. Do you see any scenario where
China would accept another Asian nation as a permanent member
of the Security Council?
Ambassador Hill. Well, I think the issue of increasing the
size of the Security Council is related to the overall issue of
reform of the U.N. and reform of the Security Council. So, I
certainly would not be in a position to say what the Chinese
will or will not accept in the future in whatever format,
except to say that I think the Chinese have a great interest in
making the U.N. work, making the Security Council work. So, I
would not try to rule out that they would include another Asian
member, but I cannot speak for what they would do in the
future.
Senator Murkowski. Sure. Just for members' information, I
arbitrarily said seven-minute rounds, just to give everybody a
first crack at things.
But before I move on to Senator Obama, just a question to
you about the comments that Secretary Rumsfeld had made in
Singapore regarding China's military buildup being a threat to
Asian security. Do you think that the rise of China is a
stabilizing or a destabilizing force there in the region?
Ambassador Hill. Well, I think the rise of China is a fact,
and it is a fact that we are going to have to live with and
work with, and, in a certain respect, try to shape. Now, we
have areas where we are cooperating with the Chinese very well;
and, frankly, I would include the six-party process in that,
even though we have not yet solved the problem there. But, to
be sure, as Secretary Rumsfeld discussed, we do have some
concerns about the trends in the Chinese military. This is not
to say that the Chinese military is of a size that will somehow
threaten our vital interests, but certainly there are trends,
there are rather substantial increases.
But another aspect of the problem is the lack of
transparency surrounding the military budgets there. In the
United States, our military budgets are discussed openly in
rather minute detail, as you know far better than I, but they
are not done so in China. So, one of the problems is the
transparency problem involving the budget and the procurement
practices.
Senator Murkowski. So you would not give a title to
either--it is not a destabilizing force, but it is not a
stabilizing force. Somewhere in the middle.
Ambassador Hill. Well, you were referring to the rise of
China, generally, or to the rise of its military budgets?
Senator Murkowski. Well, I think his comment was to the
military buildup, in general.
Ambassador Hill. Clearly, it is something that we need to
be looking at closely. And, clearly, it is something that we
need to be concerned about. But, I would add, the difficulty of
measuring it, the lack of transparency, and the overall trends
do add up to something that we need to keep a watch on.
Senator Murkowski. Thank you.
Senator Obama.
Senator Obama. Thank you very much, Madam Chairman.
Just to follow up briefly on the questions surrounding
North Korea. You know, the New York Times reported, in May,
that China ruled out applying economic or political sanctions
to pressure North Korea to abandon its nuclear weapons program,
appearing to undercut a crucial element of the Bush
administration's North Korea strategy. I guess, you know, one
of the major concerns that we have on this committee is, How do
we get North Korea to stand down on its military without, at
least from my perspective, creating a worse problem than
currently exists? And it seems China is critical in this role.
Is it accurate to say, from your understanding right now, that
China has essentially ruled out these sanctions as an
alternative? And if they have, and if the Security Council is
not an option, then do--have the Chinese offered us some
alternative pressure points that can be applied?
Ambassador Hill. Well, first of all, I do not want to say
the Security Council is not an option. It is an option we
always reserve for when we feel it is appropriate. To be sure,
we want to solve this problem through the Six-Party Talks. I
mean, we believe this is the right mechanism, and we believe it
is in everyone's interest that this get done, including the
North Koreans.
Certainly, the Chinese have attempted to persuade the North
Koreans, but I think you are quite right, Mr. Senator, that the
Chinese have been clearly reluctant to use levers such as
economic sanctions. Their major shipments into North Korea have
to do with food and fuel; and, so far, they have been reluctant
to use those levers.
The Chinese, however, continue to believe that they will
persuade the North Koreans to come back to the talks. And so,
they take a somewhat longer-term view of it than some other
people may. I mean, they believe that North Korea will
ultimately see that its interests are in coming back to the
talks, and they have constantly urged patience.
Now, our concern, of course, is that the last time the
talks took place was in June 2004, and we are fast approaching
the one-year anniversary, where we have not had talks.
Americans are sometimes known for their impatience, but I think
a year is a long time. So, we would like to see this process
going. We are working with the Chinese every day, and the
Chinese understand--as I said earlier, to the Chairman's
question--the Chinese understand that this is a major issue for
us. We cannot allow a country like North Korea to retain
nuclear weapons. We cannot allow them to have nuclear materials
with the potential or the possibility that these could be
proliferated. We need to address this problem. There are a lot
of options, but the one option we do not have is to walk away
from this problem. We have to engage. And I think the Chinese
have that message. And let us hope the North Koreans get it, as
well.
Senator Obama. Okay--another follow-up off the Chairman's
question relating to Japan and China's influence in Asia--I
appreciate and agree with your point, that China is a world
power and a growing power, and it would be shocking if they
were not interested in exerting their influence in their
backyard. And it is a fact. I it was not clear to me exactly
what Secretary Rumsfeld's point was in that Singapore
interview. It strikes me that one of the things that we do have
control over is our own behavior in that area. And, as you
indicated, if we are doing a good job maintaining our military
alliances in that area, if we are consistent in how we apply
foreign aid in that area, then there is no reason why we can
not have a strong United States in the Pacific, as well as a
strong China. So, I appreciate that sentiment.
I am concerned about some of the anti-Japanese
demonstrations that seem to have been orchestrated, to a large
degree, by the Chinese Government. I think that your point
about history is a good one. But some of this also has to do
with raw politics and strategic interests. One area, in
particular, that seems to have been raising some issues between
the two countries is the dispute over gas fields in the China
seas. And, according to press reports, at least, China has
refused the Japanese request to stop exploring gas fields. The
Japanese, in turn, have turned down the Chinese proposal for
joint development.
I am wondering--on the specifics of that issue--how serious
of an impediment is that to improved relations between the two
countries. More broadly though, it strikes me that this goes to
a larger issue, and that is China's need for energy and how
that is going to have an impact, not only in Asia, in its
relationship with countries like Indonesia, but also its
relationship to countries like Sudan, where we may have some
contrary policies with respect to Darfur, for example.
I know that was a broad question, but----
Ambassador Hill. It was a broad question, but a very good
question. First of all, with respect to the military buildup, I
want to be very clear, we are concerned about this buildup, and
we see some trend lines that are troubling, to be sure. And
Secretary Rumsfeld spoke about those. Secretary Rice spoke
about those the other day. But we have to track that situation
very carefully, and we have to see what these military forces--
what sort of capabilities they are trying to build up to. This
is not just a question of raw numbers; this is a question of
the change in those numbers, the trends, and also the kinds of
capabilities that they are developing. And then when you add to
that the problem of transparency and the fact that it is a
difficult process to measure how the budgets are being handled;
it is something that keeps the analytical community very, very
busy. So, we have to track that very carefully.
With respect to Japan, I completely share your point of
view. To the extent that any street demonstrations were in any
way officially inspired, this is obviously not acceptable. Now,
the Chinese have said that they were not, but many independent
observers say that they were. And, clearly, as someone who is
served most of my career overseas as a diplomat, I like to make
sure that, you know, the embassy that I am working in is going
to enjoy the protection of the host country, as is required by
the Vienna Convention. So, there are issues there to be
concerned about.
With respect to the issue of China and Japan actually
seemingly competing, in, sort of, 19th-century terms, for
energy, indeed, this strikes us as, sort of, a mercantilist
problem that should not exist in the 21st century.
Now, I want to say that although there has been some
competition, there is also been some cooperation there, and we
were pleased to see some Japanese delegations talking to
Chinese delegations in trying to address this issue. Because,
ultimately, the issue is not to remove energy resources from
the world market; the issue is to develop energy resources so
you increase the supply of energy and are able to moderate the
price. So, we have seen some positive trends in terms of China
and Japan working together on, especially, these offshore
sources that you mentioned.
Finally, you mentioned the overall global issue. China's
energy needs are going to be enormous in the future. And China
is----
Senator Obama. Sorry to interrupt, but do you--just to
give the committee a sense of, sort of, the level of magnitude,
in terms of the increases there--and I know I am out of time,
Madam Chairwoman--just briefly, as you are talking about it, do
you have a sense of what--you know, how rapidly those energy
needs are increasing and----
Senator Murkowski. Senator Obama, I might just add that,
on the second panel, we have got someone who will be
specifically addressing those energy needs, if Mr. Hill does
not have that information.
Ambassador Hill. China uses about six million barrels a day
of oil, and the United States uses about 20. And, in some 20
years, we expect China to be up to some 20.
One other statistic that I think is worth noting is, the
per-capita income of China is still in the neighborhood of
$1,200. If China continues to grow at, say, 9 percent, which is
what they have been doing lately, probably by 2020, or
something like that, they will be at $3,000 per-capita income.
Per-capita income in the United States is variously estimated
at about $30,000, just to give some order of magnitude to that.
But let me say that China is looking for energy resources.
The question is, Are they looking to develop energy or are they
looking to take it off the market? And that is the issue that
we need to be engaged with the Chinese. And we do have a very
good dialogue with them on energy. The Department of Energy has
an energy policy dialogue with China's National Development and
Reform Commission. In the State Department, we have had a
number of discussions with them, and will continue to do so.
And, finally, there are commercial opportunities for U.S.
firms. China is looking to build some 40 new nuclear power
plants, and these involve a technology that some U.S. companies
can really have something to offer.
Senator Murkowski. In keeping with the early-bird rule, we
will, next, go to Senator Feingold.
Senator Feingold. I thank the Chair. And it really is hard
to imagine a more timely and important matter to have a hearing
about, and I thank you for your leadership on this.
Mr. Hill, obviously you have a crucial job ahead of you in
responding to the emergence of China throughout Asia and the
world. And I am very pleased that you have talked previously
about the need to prioritize human rights in China. I have
tried over the years to be as vocal as I can be about the need
for labor rights and religious tolerance and the promotion of
human rights in China.
I would like to ask you to talk about what the United
States can do to ensure that, as China gains greater economic
power, the Chinese Government does not mistakenly assume that
human rights will become a less important part of the U.S./
Chinese relationships.
Ambassador Hill. Well, thank you, Senator Feingold, for
mentioning that issue, because it is one that is very dear to
my heart and, I think, really to every American, because I
think human rights is really part of the basic fiber of what we
are.
Let me say, though, that in every discussion--I mean, at
every level with the Chinese officials--U.S. officials raise
these issues. Sometimes we raise very specific issues about
individuals, sometimes we raise broader issues, but I want to
assure you, Mr. Senator, that human rights is very much a part
of our ongoing dialogue and, I would say, an important part of
our relationship with China.
Last year, the State Department programmed some $13.5
million to promote legal reform and judicial independence,
transparency and public participation in government and
fostering civil society. So, we are not only talking about it,
but we are actually identifying specific programs where we
believe we can make a difference.
We have had some working-level discussions related to our
human rights dialogue. They took place in November 2004 and
February 2005. We do not believe there are any additional
preconditions to resuming the formal bilateral human rights
dialogue. But we based this dialogue not just on talking, but
actually producing some results.
As China emerges on the world stage, I think it is
important--China emerges, and other countries emerge, too--it
is important to understand that human rights and rule of law
are really part of the ticket of being on that stage. To be a
world power is to subscribe to certain universal values. Our
job is to make sure the Chinese understand that from our
perspective.
Now, it is important to look at countries which have
various levels of human rights, and to determine whether they
are going in the right direction. And that is where we want to
see that China is heading in the right direction. And so, China
is a vast country with some vast problems, especially rural/
urban problem, where, you know, one would look at the human
rights differently in different places. But what I want to
assure you is, we are really on this one.
Senator Feingold. I do appreciate that statement and look
forward to working with you on the matter of human rights in
China.
Another matter--this hearing really is not focused on it,
because this hearing is focused on China's emergence in Asia--
the fact is that China has been able to win goodwill in a fair
amount of other places in the world by assisting with
development in other projects. For example, the Chinese
Government is offering rather tangible support across Africa
that creates goodwill and longstanding relationships--I heard
about 20,000 Chinese workers building housing in Algeria,
soccer stadium financial arrangements in Mali, and other things
that the presidents or leaders of the countries, sort of, went
out of their way to let me know was going on; and, presumably,
in some cases, to secure access to African oil markets, but not
necessarily exclusively for that purpose. Obviously, there may
be a variety of reasons. The fact is, there is quite a
presence. And sometimes I am struck by our lack of presence in
those same countries.
What is the United States Government doing, and what is it
not doing that it needs to do, to respond to such efforts by
the Chinese?
Ambassador Hill. Well, first of all, we maintain a very
active foreign policy throughout the world. There is no
country, including China, that has as many embassies, as many
diplomats, aid missions engaged throughout the world dealing
with these problems. I think it is important that, when you
make contributions to a country, you are taking precious
resources--I call them ``precious'' because they come from our
citizens--and you are making sure that those tax dollars are
going to helping these countries deal with economic problems,
helping them deal with problems of governance and capacity. And
I would hope that, as China is growing, and China develops the
ability to provide assistance, that they do it in a way that
makes these countries better able to cope with problems of
development.
So, to be sure, we probably need to talk to the Chinese
about some of these issues. I think it is very important that
the Chinese, when they look to provide support to a country,
that they do it in a way that is going to make that country
better able to cope in the future.
Frankly speaking, if you go back through our history and
look at some of our early efforts at assistance, some of them
did not pan out very well. And I think we have learned a lot in
assistance. And if China's desire is to help poorer countries
become better off, and ultimately become markets or become
sources of goods, they should really be very careful how money
is spent, so that it is encouraging good governance, not bad
governance.
Senator Feingold. Thank you, Mr. Hill.
I thank the Chair.
Senator Murkowski. Senator Voinovich?
Senator Voinovich. Congratulations on your new
responsibility. I have had the privilege of working with Mr.
Hill when he was Ambassador to Macedonia, and then the
Ambassador to Poland, and I was very delighted to see you get
this assignment.
In your remarks, you said China's growth need not be at our
expense, and--I am from Ohio, and if you travel my state, you
will find that many people have said that their growth has been
at the expense of our state, and particularly of manufacturing.
We have a $162 billion trade deficit with China. Most of it is
in manufacturing. And the question I have is, how involved--I
know that you have got the State Department, and you have your
Foreign Commercial Service offices that are part of the
Commerce Department, located at the embassy--but how are you
going to be involved in this whole issue of intellectual
property rights violations that is occurring today, is rampant,
and also the issue of the fixing of their currency, which many
of us feel needs to be dealt with very soon?
Ambassador Hill. Well, first of all, Senator, it is great
to see you. We first met in a refugee camp in Macedonia, and it
is a great pleasure to see you here.
I think, on the issue of U.S. jobs, of U.S. goods and
services, we absolutely have to be able to export. We need
markets for our goods, and it is really not enough just to talk
generally about the problems of free trade when people are
losing their jobs in places like Ohio. I must say, Mr. Senator,
every time we have talked, we have talked about the problem of
people in Ohio and jobs and things like that. So, what I want
to assure you of is, I understand that this is of crucial
importance, because, ultimately, our country is not going to be
able to be successful in the world if we can not export, if we
can not have access to the markets. We have given access to our
markets in a way that is simply unprecedented in the history of
the world. I mean, we have basically helped countries come from
nothing to being wealthy countries, thanks to our market. So,
we do have to find ways--and, frankly, insist--that our goods
have access.
Now, IPR is a very important issue for us, because a lot of
what we do in our economy depends on----
Senator Voinovich. Pardon me, is that going to be part of
your portfolio, though? Because you have got intellectual
property rights, you have got the Commerce Department, and you
have the Patent Office, you have USTR----
Ambassador Hill. Intellectual property rights are something
that whenever you--whenever I see a foreign official in Asia,
it is one of the things I raise. And, certainly, whenever we
talk to the Chinese, it is one of the things I raise. So, I
raise it, and the question is, Do I go through the motions, or
do I take it seriously? And I want to assure you that I
absolutely take it seriously.
With respect to the issue of the exchange rate, as you
know, Treasury takes the lead on that. I think you know,
obviously, that this is an issue involving our leadership at
the very highest level--and, certainly, I do my part there, but
that is something that is being led by our Treasury Department.
Senator Voinovich. Well, I think that one of the things
that took my attention, I think it was a couple of years ago,
is, when we got into the whole issue of China's fixing their
currency, and the only people that could talk about it were the
Secretary of Treasury and Condoleezza Rice, who was over at the
National Security Council. And there are many people that think
that perhaps we have not been as aggressive as we should be on
the economic side, because of the fact that we are relying so
heavily on China to provide leadership to dealing with the
problem that we have got with North Korea. Would you like to
comment on that?
Ambassador Hill. I deal, quite often, on the problem of
North Korea. And I believe pretty firmly that when you look at
our policy toward China in the economic area, especially in the
exchange-rate area, that it is not constrained by our policy to
North Korea. North Korea is a big priority for us, obviously--
the presence of nuclear weapons, the danger of the nuclear
weapons, the danger of proliferation--but that does not mean
that we cannot pursue policies that can help the American
worker. So, I think we are prepared to do both and to make them
both very high priorities.
Senator Voinovich. Well, I will say that, you know, we are
going to be getting various trade agreements coming before
Congress, and I think one of the biggest impediments, in terms
of getting those trade agreements passed is the enforcement of
our trade laws. And I am glad to know that the State Department
is going to be active, in terms of letting people know how
important they are.
The other issue is the issue of the environment. We have
been criticized roundly because we have not signed the Kyoto
Treaty. And one of the reasons we have not done it is because
the developing nations are exempt from it. Is there anything on
the table at the State Department to perhaps get involved in
that issue, in terms of China? Because I think if they are not
brought on to--in to the table, we are never really going to
get anywhere with the environment. I spent a week over there,
and their environmental problems are horrendous. In fact, some
argue that 20 percent of the mercury in the Great Lakes comes
from the ASEAN. Is that going to be on your plate as one of the
issues that you are going to be talking about?
Ambassador Hill. That is definitely on the plate of the
State Department. We have a bureau that deals with that--OES--
and it is certainly something that the Commerce Department and
others have been concerned about. It has not directly been on
my plate, as the Assistant Secretary for East Asia Pacific
Affairs, but, Senator, I can not agree with you more. I have
been to China, I have seen some of those problems. In fact, I
lived in Korea and felt some of those problems in the air. So,
I completely agree with you, the environment is an issue that I
think the Chinese, themselves, understand the need to do more
about. We do have a dialogue with them, conducted through the
State Department, and, I agree, we need to do more.
Senator Murkowski. Thank you.
Mr. Hill, I have a couple of more quick questions, and then
we will see if others have any additional questioning.
You mentioned, in your initial comments, just very briefly,
Taiwan and the impact, if you will, or the recognition that the
anti-secession law was unhelpful and is--essentially, is a step
back. Given China's, certainly, increasing role in the area,
and the relationships that we are seeing being built, how does
this affect how the U.S. is handling, or dealing with, the
policy regarding Taiwan? Does it change at all?
Ambassador Hill. Well, our policy has been pretty firm and
pretty consistent. We have encouraged both Taiwan and China to
engage in a dialogue that will lead to a peaceful resolution of
their differences. And it is based on our one-China policy, the
three joint communiques, and the Taiwan Relations Act. And,
again, we have been very consistent about this, that we do not
support Taiwan independence. But I also want to emphasize what
President Bush told Chinese Premier Wen in December 2003, which
is that we oppose unilateral moves, by either side, that would
try to alter the status quo.
We have made clear to the Chinese--including Secretary
Rice, during her trip--that the anti-secession legislation was
unhelpful and did not contribute to the kind of dialogue we
feel is essential, but we do believe that there is now some
basis for a substantive dialogue, that there were some trips by
the Taiwan opposition, of course, and we would like to see this
carried over to discussions with the Taiwan authorities.
The United States continues to pursue unofficial relations
with the people of Taiwan. We also support Taiwan's engagement
with the international community in appropriate venues that do
not require statehood for membership. And that is why we
continue to support the goal of Taiwan's participation in the
World Health Assembly. Taiwan was not successful in obtaining
World Health Assembly observer status this year, but this does
remain our goal.
And, again, our support for observer status for Taiwan does
not conflict with our one-China policy.
Senator Murkowski. So, nothing really has changed, in
terms of how the U.S. is viewing the situation or its policy as
it relates to Taiwan.
Ambassador Hill. We are certainly very keen observers of
the situation. We have certainly made clear our views of the
need for dialogue and our opposition to unilateral moves, but I
would not say these are new policies.
Senator Murkowski. And then, just one last question. How
will the stability of the region be affected if the E.U. arms
embargo should be lifted?
Ambassador Hill. Well, we have made clear to the European
Union that we think this is really the wrong way to go. We have
a Chinese military that has rather steep growth, as Secretary
Rumsfeld and Secretary Rice mentioned. So, we do not feel this
is any time at all to be lifting the arms embargo on China. The
original reasons for it, for the embargo, are, I think, still
in place. And, moreover, I think, in the wake of the anti-
secession law, it should be abundantly clear to everybody that
this would be a very unwelcome move.
We are trying to engage the Europeans in a strategic
discussion of how we see the situation in Asia, of how they see
the situation in Asia, to try to bring our understanding of the
situation in Asia closer together so we will not have any kinds
of miscom-munications. But, clearly, we remain very firm in our
opposition to changing the embargo.
Senator Murkowski. Do you feel you are making progress in
those discussions, then?
Ambassador Hill. Well, I do. I think we had a very good
discussion in Brussels recently, where we discussed how we see
the situation in Asia, where we had a strategic dialogue with
the Europeans. And I was very pleased at the level of discourse
and the fact that I think we have a lot of common ground.
And I want to stress that, although we often disagree with
the Europeans, and this was one of those issues, we do retain a
lot of common ground with them, and I think this was very much
on display when we were talking in Brussels last week.
Senator Murkowski. Thank you.
Senator Obama?
Senator Obama. Yes, just a couple of quick follow-up
questions. You know, Senator Voinovich and I share a similar
economic profile in our states, a manufacturing base that is
deteriorating rapidly, so two comments just to follow up on his
questions.
The first is, What is your assessment of how much
difference a revaluation of the yuan would actually have, in
terms of our constantly spiraling trade deficit with China? And
if that is not the main problem, is there any administration
policies that are in the works that might try toreverse that
trade imbalance? That is question number one.
Question number two, with respect to intellectual property,
I mean, this is an area where I think there is less dispute,
that there just are no serious intellectual property
protections in China. You know, I was meeting with the CEO of
Starbucks, and he was remarking on how if you go to China,
there is Starbucks everywhere; the only problem is, they are
not owned by Starbucks. People have just started up a bunch
of--they have the same logo, it looks identical. I guess the
coffee is not as good.
So, you know, this is different from just, you know,
bootleg DVDs. I mean, this is something where you have got a
physical store there for everybody to see, in which a U.S.
trade market is being encroached upon.
But my question on the trademark issue is, Are we being
flexible enough and thoughtful enough about how to structure
trademark protections in an economy in which grafting U.S.
trademark law, or intellectual property law, copyright, may not
be perfectly appropriate? I can not imagine that people in, you
know, rural China can afford whatever it is that I am paying
for a DVD for my kids, the Little Mermaid or something. So,
that it may not be a exact transplantation of all our laws, but
we might still have some semblance that--of intellectual
property protection that takes into account that China's at a
different stage of development? I am wondering whether we are
being sufficiently flexible and creative in exploring how we
can get around some of those problems.
Ambassador Hill. Well, first of all, you are absolutely
right, there is a big problem; and it continues to be a big
problem, in terms of China improving its intellectual property
rights protection. In fact, we really do need to see some
actual reduction in the counterfeit rates--in the piracy and
counterfeit rates, and we are not seeing those yet. So, this
is--I am not going to hide it from you, this is a big problem.
The U.S. Trade Representative recently elevated China to
the priority watch list under the Special 301 review. And we
are using WTO TRIPS agreement's transparency provisions to
formally request specific evidence from China on the operation
and administration of its IT enforcement. That is to say, we
are really pushing them very hard, using the various levers
that we have available through international trade agreements
to push them on it. So far, it does not seem to be enough. And
I think we have to continue to push them on this. We are----
Senator Obama. Can I just interrupt you on that point----
Ambassador Hill. Yes.
Senator Obama (continuing). ----on the WTO issue? China
feels it is benefitting from its WTO membership. Is the problem
here that it is just there are so many exhaustive requirements
and steps we have to go through before we finally go ahead in
getting a ruling from the WTO that they are violating----
Ambassador Hill. Well, I want to emphasize that I am
interested in this issue. I raised this issue with the Chinese,
but I am not the expert that can talk to you specifically about
the questions of rights and responsibilities under the WTO.
But, you know, certainly, we need to continue to press this.
And what I want to assure you of is, we do not just leave this
for the Department of Commerce, for example, because I think
the Chinese need to hear this from all of us--State Department,
as well--to make very clear that we are very concerned about
this, and this is a major issue in our bilateral relationship.
With respect to the currency question, most analysts--first
of all, I--again, I want to be very careful about this. This is
something that the--Secretary Snow speaks to, in the Treasury
Department, not me. But I will say that the locus of analysis
on changing the exchange rate--the analysts do not feel it
would make a big difference in the short run, but certainly if
it were done, it would be a very key indication of China's
willingness to do more and address this overall problem.
You know, ultimately, I think one can borrow a term used
normally in the environment, ``sustainable development.'' I
think, ultimately, China needs to look at the U.S. market as
something that it needs, not just this year or next year, but
for decades to come. And I think when the Chinese look at our
market, for decades to come, they will see the need to work on
these issues, to clean up these issues, so that this trading
relationship we can have is sustainable. And that is the kind
of approach I would try to get, very specifically, on these
issues. And, you know, there is not much macro-management of
these things. You have got to get right into the individual
subjects and go after each and every one of them. And what I
want to assure you is that I am willing to do that.
Senator Obama. Just one last comment. This is more of a
comment than a question, but feel free to share your thoughts
on this. On a couple of these issues, one of the things that I
hear from businesses that are concerned about intellectual
property encroachment in China, or trying to break through non-
tariff barriers in China to increase our exports, is a lack of
coordination among the various branches of the U.S. Government
and a preference, in certain circumstances, to simply avoid the
U.S. Government entirely in dealing with China, because they
are fearful that, either because of the lack of coordination or
a not-very-nuanced strategy, that sometimes the U.S. Government
can do more harm than good, and the Chinese Government can end
up penalizing them in ways that they are not happy with.
So, just an observation. That is something that I have
heard directly from those who are doing business in China. It
is not something that I have firsthand knowledge of. But I
think it would be useful, since, during the testimony, you
referred to the fact that this is Commerce's issue, or this is
Treasury's issue. And I appreciate lines of responsibility and
expertise and divisions of labor, but it just seems to me
that--with such a critical relationship at stake here, and so
many concerns on the part of our constituents back home that it
is very important that we have very good coordination between
USTR, Commerce, Treasury, and your Department, as well.
Ambassador Hill. I absolutely share your sentiment on that.
We do need to be well coordinated. And I stress to you that,
while I said that this is Commerce's area, I take a great
interest, and I think it is important for China, and any other
country, to understand that this is a thought-out position
across-the-board in the U.S. Government because we too work for
your constituents back home, and we are very aware that we
cannot have free trade if our people do not support it.
Senator Obama. Thank you.
Senator Murkowski. Senator Voinovich?
Senator Voinovich. Yeah, I would like to comment. Senator
Obama, one of the things that I have been working on for the
last, probably year and a half is the very issue that you are
talking about. And I brought this issue of lack of
coordination--in fact, I had a hearing on the Oversight of
Government Management Restructuring to look at Commerce, USTR,
Customs, Patent Office, and the Commerce Department has come up
with a new program called STOP. And it is a one-stop shop,
where a small company that feels that they have been stepped on
can go to Commerce and get some quick results, in terms of
their problem. I am going to be having another hearing to find
out whether or not they have the manpower to enforce the law--
or, not the law, but the program, and also to see if they have
had any success. And I am going to be interested--when I was
with Premier Wen, I spent about an hour and 20 minutes with him
about two months ago, and we talked about intellectual property
rights. I brought to his attention, Mr. Hill, Ambassador, three
cases, exactly--Ohio, the company that makes these lights on
tops of police cars; Gorman-Rupp, that makes pumps; Step2, that
makes toys--and basically challenged him to do something about
it. In other words, we get a lot of lip service from them, but
the real issue is to have them follow up and really show that
something is happening. And I applaud you for what you are
doing, but I think you need to redouble your efforts, because
if we do not get this thing straightened out, as I mentioned to
you earlier, we are going to have a real problem, in terms of
international trade. Now, certainly, Ambassador Zoellick gets
it. But we have really got to do some work in that area if we
expect to be--if we are going to have any more trade agreements
and, you know, move our--us ahead in international trade.
The other thing I would like you to comment on is that
everyone seems to think that this anti-secession legislation
the Chinese passed was very bad. And one of the points of view
that I got from Premier Wen was that, ``Yes, we did that. But
the fact of the matter is that we are probably going to--
increasing more dialogue and more commercial exchange under
this administration than at any time before.'' The question I
have is--you mentioned that he met with the minority
representatives from Taiwan. Do you see any other activity
there that shows that perhaps they did pass the anti-secession
legislation, but that, on the other hand, they have improved
their relationship with Taiwan in some other regards over what
it was before?
Ambassador Hill. Well, I think, clearly, the dialogue with
the opposition leaders was a good step, and I think it did
allow a change in the dynamic following the anti-secession law.
And the problem with the anti-secession law is, of course, that
it reiterates that they reserve the right to use non-peaceful
means. And that is what, I think, many, many people were
concerned about.
Whether they are able to capitalize on this step, whether
they are able to follow through, remains to be seen. The
Beijing Government is not yet prepared to deal with the elected
authorities in Taiwan, because they are rejecting the condition
that the elected authorities set forward. And I think our view
would be, dialogue should just be dialogue, and should not
depend on any conditions, and that, ultimately, when--anyone
who has been to Shanghai and looked at the region there, or
anyone who has looked at the Taiwan coast, realizes this has to
be solved by peaceful means. There is absolutely no other way
to do it. And the way to solve it is to have broader dialogue.
So, I hope that they will follow up and pursue it.
Senator Voinovich. North Korea, the way I observe the
situation is, that both the South Koreans and the Chinese do
not seem to appreciate the nuclear threat of North Korea, and
that they are trying to go about doing it through an economic
relationship that is going to soften them up a bit and get them
to realize that life will be better if you back away from this
and open your doors and start to work with the rest of the
world.
Ambassador Hill. Well, I would rather emphasize that, in
the six-party process, there is a lot of agreement on how to
proceed. And I think we have been really in sync with the South
Korean Government on how to do this. Now, to be sure, South
Korea has a special situation, in that their country, Korea,
was divided, brutally divided, in the middle of the 20th
century. And I think those of us who deal with the South
Koreans, who encourage them or who are concerned about some of
their policies, we have to bear in mind that very brutal fact
that is so deeply, deeply troubling to their people there.
But, you are quite right, they do have an idea that--in the
long run--engagement is probably the way to go to change that
society, and certainly that is an important priority for them,
as reflected in the inter-Korean dialogue, which has gotten
going again this month. In fact, there are some meetings coming
up next week. But, at the same time, they understand, they
fully understand, that there cannot be nuclear weapons on the
Korean Peninsula. And I think the question--you know, there may
be nuances of difference over how to solve it, but I think
everyone understands this needs to be solved.
Senator Voinovich. Thank you.
Senator Murkowski. With that, thank you, Mr. Hill.
Appreciate your time that you have spent here this afternoon
with the subcommittee, and for sharing your thoughts as China
emerges and develops.
And, with that, we will call the second panel.
We will welcome to the second panel Dr. Minxin Pei, the
Senior Associate for the Carnegie Endowment for International
Peace; Dr. Mike Herberg, the Director of Asian Energy Security
Program at the National Bureau of Asian Research; and Professor
Catharin E. Dalpino, the Adjunct Professor of Southeast Asian
Studies.
So, welcome. Thank you all for joining us this afternoon.
We have a little bit less time for the second panel, but I am
certainly looking forward to hearing your comments. And thank
you for taking the time.
With that, why do not we start at this end, with you, Dr.
Pei, and we will move to the--to my left, following that. So,
if you will give your comments, please?
STATEMENT OF MINXIN PEI, SENIOR ASSOCIATE, CARNEGIE ENDOWMENT
FOR INTERNATIONAL PEACE, WASHINGTON, D.C.
Dr. Pei. Thank you very much, Madam Chairwoman.
I have prepared an extensive written comment--written
testimony for today's hearing. In the time allotted to me
today, I will summarize the main points of my testimony, but I
request that the full testimony be entered into the record for
today's hearing.
Senator Murkowski. Your full testimony, as well as that of
the other panelists, will be included in today's record.
Dr. Pei. Thank you.
The emergence of China as a major global power is one of
the most important developments facing the United States. In
designing its policy toward China, one of the most critical
factors that should inform American policymakers is China's
internal political evolution. As we all know, China has been
transforming its economy since the late 1970s, and this process
has brought China into the international community and improved
lives of Chinese people.
During this process of economic modernization, China's
political system has also begun to evolve. One of the most
important aspects of this political evolution is the reform of
China's legal system. Generally speaking, China has made mixed
progress in building a modern legal system that can effectively
protect property rights and human rights. On the positive side,
China has, over the last 25 years, passed nearly 400 laws that
have laid the foundations for a modern legal system. Especially
noteworthy is the progress made in the passage--implementation
of commercial laws designed to facilitate trade and protect
investment. Considerable progress has also been made in
modernizing administrative laws. Some progress has been made in
improving the criminal code. The Chinese Government has also
amended the constitution and enshrined the protection of human
rights and private property rights in the constitution.
Also on the political side, legal reform has begun to have
a healthy impact on China's social and economic activities.
Chinese citizens and private entrepreneurs are increasingly
using the legal system to protect their personal and property
rights. The number of lawsuits filed in civil courts has been
rising steadily. Chinese courts handle about five million civil
suits today. This indicates some rise of confidence in the
court system. Chinese citizens have also begun to sue local
governments for abuse of power.
However, despite such progress, China has not established a
genuine modern legal system or a rule of law. The momentum of
legal reform has slowed since the 1990s. Many important legal
reform measures that ought to have been taken are delayed, some
indefinitely. There is no sign to indicate that the Chinese
Communist Party is genuinely committed to building a modern
legal system.
The following are the most glaring weaknesses of the
Chinese legal system today:
First, lack of judicial independence. The court system is
controlled by the Chinese Communist Party and local
governments. Judges are appointed by the party and local
governments. Judges lack job security and power to adjudicate
court cases. The courts are dependent on local governments for
funding. Party and government officials routinely interfere in
court decisions.
Second, weak judicial authority. Because Chinese courts are
really part of the state bureaucracy, they typically lack the
political authority to enforce their decisions. As a result,
court judgements cannot be enforced if they are resisted by
local authorities.
Third, judicial corruption. The political control over the
court system has led to widespread corruption in the legal
system. Unethical judges routinely take bribes in exchange for
judgements favoring those who offer the bribes. Chinese press
often carries reports of senior judges being prosecuted for
corruption.
Finally, low respect for the law. This is largely because
laws on the books in China are not enforced, or are ignored, by
the government, itself, in reality. This has created a huge
discrepancy. While a large number of Chinese laws have strong
provisions for individual and property rights, in reality such
provisions have little meaning, because the government,
especially local authorities, can ignore them with impunity.
It is clear that the Chinese Government is aware of these
problems, and reformers within the Chinese Government have been
trying to address them for a long time. But, so far, judging by
the facts on the ground, it appears that China remains far away
from its own declared goal of ruling the country according to
law.
Thank you.
[The prepared statement of Dr. Pei follows:]
Prepared Statement of Minxin Pei
I want to thank the committee for giving me the honor to testify
today on China's legal reform in recent years. My remarks are divided
into three parts. The first part describes the progress made in the
strengthening of China's legislative institutions and analyzes the
limits of this process. The second part addresses the progress and
limits in China's legal reform. The last part comments on policy
options for the United States.
I. PROGRESS AND LIMITS IN BUILDING LEGISLATIVE INSTITUTIONS IN CHINA
The emergence of the National People's Congress (NPC) and, to a
lesser extent, local people's congress (LPC), as major actors in
decision-making in China in the reform era has been hailed as a sign of
political institutionalization or even pluralization. The growth of the
NPC as one of the most important political institutions in China has
been extensively documented.
Legislative Output: The most important achievement of the NPC was
its enormous legislative output (Table 1). The several hundred laws and
resolutions-passed by the NPC since 1978 have provided the legal
framework for economic reform and rationalized administrative
procedures. For example, of all the laws and resolutions that were
enacted by the NPC from 1978 to 2002, 95, or about a third, were
``economic laws.'' Of the 216 new laws passed from June 1979 to August
2000, 126 were classified as ``administrative laws.'' But these numbers
should not be taken at face value. In the passage of most laws, the NPC
has largely played a secondary role, endorsing the bills drafted by the
executive branch. On a few rare occasions, the Standing Committee of
the NPC showed its autonomy by rejecting the bills proposed by the
government. Like the NPC, LPCs rarely rejected bills proposed by local
governments. When they do, it becomes national news, as in the case of
the People's Congress of Shenzhen which voted down, in 2004, a law on
auditing and supervising the local government's investment, an
unprecedented act of political independence. Official figures also
indicate that individual legislators play an insignificant role in law-
making. Not a single bill proposed by NPC delegates has been enacted
into law. For example, from 1983 to 1995, more than five thousand bills
were proposed by delegates, but only 933 (18 percent) of them were
referred to committees. There was no record that any of the proposed
bills ever becoming law.
Table 1. Legislative Output of the National People's Congress (NPC),
1978-2003
------------------------------------------------------------------------
Resolutions
Years Laws Passed Passed
------------------------------------------------------------------------
Fifth NPC (1978-1983)................. 41 19
Sixth NPC (1983-1988)................. 47 16
Seventh NPC (1988-1993)............... 60 27
Eighth NPC (1993-1998)................ 85 33
Ninth NPC (1998-2003)................. 74 n.a.
------------------------------------------------------------------------
Constitutional Oversight Power: On paper, the constitutional
oversight power of the NPC has expanded significantly. The NPC
supervises the courts and appoints and removes officials. It also
investigates and oversees the work of the executive branch, approves
the work reports of the State Council, the Supreme People's Court, and
the Supreme People's Procuratorate, reviews and approves budgets, and
provides legislative interpretations. The NPC can review the
constitutionality of laws, inspect the implementation of specific laws
by supervising individual court cases, hold hearings, conduct special
investigations, and impeach and dismiss government officials. But in
reality, the NPC has seldom asserted its formal oversight power. For
example, the NPC has never declared a law unconstitutional or rejected
a working report by the State Council, the Supreme People's Court, or
the-Supreme People's Procuratorate. It had never refused to approve a
budget, launched its own special investigations, or initiated
proceedings of dismissal against a single government official. The
NPC's inspection tours or hearings do not appear to have had any impact
on policy, either. The most visible expression of the NPC's oversight
power is rather symbolic: each year, about 20 percent of the NPC
delegates voted against the work reports of the Supreme People's Court
and the Supreme People's Procuratorate.
By comparison, in some provinces, cities, and counties, the LPCs
occasionally have tried to be more assertive. LPC members sometimes
take local bureaucracies to task for poor performance and corruption.
Deputies of LPCs sometimes demanded audits of the expenditures of local
governments and criticized local governments' commercial deals and
corrupt activities. In wielding one its most controversial oversight
powers, LPCs also began to monitor judicial proceedings, mainly as a
response to rampant corruption in the judicial system. LPCs' oversight
of judicial proceedings in both civil and criminal cases can force
courts to conduct trials with greater transparency and integrity.
Typically, LPC delegates would review files, interview witnesses, and
sit in on trial proceedings. In one instance, such intervention helped
free a peasant wrongly convicted of drug trafficking.
Appointment and Removal Power: Another noteworthy development is
that LPCs have become an arena in which bureaucratic and factional
politics begin to influence, in a very limited way, the appointment of
local officials. Because Chinese law mandates ``competitive elections''
(cha'er xuanju) for senior local officials, LPC delegates have an
opportunity to use such (indirect) ``elections'' to foil the
appointment of official candidates and elect their own choices. Under
Chinese law, an official candidate cannot be appointed if he/she fails
to gain half of the votes of the delegates. LPC delegates can also
write in their nominees. In Liaoning in the late 1990s, for example,
the CCP's provincial organization department (POD) reported that an
increasing number of official candidates could not be confirmed by LPCs
due to factionalism, poor lobbying by the party, and unattractive
nominees. Local legislators occasionally were successful in nominating
and electing their own candidates to local offices. In five cities in
Liaoning, twelve ``independent'' candidates were elected to local
offices. Similar incidents occurred in Hangzhou's twelve counties in
the 1990s. Each time the county people's congress appointed officials
nominated by the party, an average of six to nine official nominees
would fail to be appointed, while the same number of unofficial
candidates nominated by the delegates themselves would get ``elected.''
In the counties where the LPC delegates were the most assertive, about
10 to 15 percent of the official nominees would fail to get elected. In
practice, however, such revolt by LPC delegates is rare, and nearly all
the candidates nominated by the CCP are appointed. According to a
senior NPC official, from the mid-1980s to the mid-1990s, only 2
percent of the candidates nominated by the provincial CCP committee
failed to win ``elections'' at the provincial people's congress.
Organizational Growth: Organizationally, the NPC has grown
considerably as well. The body had only 54 full-time staffers in 1979.
By the mid-1990s, the number had risen to about 2,000. The NPC's
committee system grew as well. From 1983 to 2003, the number of
specialized committees in the NPC Standing Committee rose from six to
nine. Nationwide, the number of staffers in the people's congress
system at and above the county-level reached 70,000 by 1997. However,
as a whole, the membership of the NPC and LPC does not mirror Chinese
society. Rather, it appears to better represent the bureaucratic
interests of the Chinese state and the ruling CCP. For example, nearly
all of the 134 members of the 9th NPC Standing Committee (average age
63.4) were retired government and party officials. CCP members make up
about two-thirds of the delegates to the NPC and LPCs.
II. LEGAL REFORM AND ITS LIMITATIONS
The record in-legal reform since the late 1970s has been mixed.
While the Chinese government has made unprecedented progress in many
areas of legal reform, the Chinese legal system remains structurally
flawed and ineffective because the CCP is fundamentally unwilling to
allow real judicial constraints on the exercise of its power.
The motivations to undertake even limited legal reform were
compelling for the CCP in the post-Mao era. To restore political order
and create a new legal framework for economic reforms, reforming and
strengthening the legal system was a top priority for the Chinese
government. Indeed, China's legal system, developed under a planned
economy and wrecked by a decade of political turmoil during the
Cultural Revolution, was inadequate, outdated, and ill-suited for a
transition economy. Economic reform would have been inconceivable
without reforming the legal system. Thus, the CCP's need for survival
through economic reform overlapped with the practical necessity for
legal reform.
To be fair, the progress in legal reform since the end of the Mao
era has been unprecedented in Chinese history, as reflected in the
passage of a large number of new laws, the increasing use of the courts
to resolve economic disputes, social and state-society conflicts, the
development of a professional legal community, and improvements in
judicial procedures. As a result, legal reform has greatly increased
the role of courts in adjudicating civil, commercial and administrative
disputes. As indicated by the data on the rapid growth of commercial,
civil, and administrative litigation, Chinese courts have assumed an
indispensable role in resolving economic, social and, to a limited
extent--political--conflicts (Table 2). A number of empirical studies
on commercial and administrative litigation show that, despite its
flaws, China's legal system is capable of providing limited protection
of property and personal rights. In addition, China's legal profession,
including judges and lawyers, has expanded rapidly during the reform
era. The number of lawyers rose from a few thousand in the early 1980s
to more than 100,000 in 2002. The number of judges nearly doubled from
the late 1980s to the late 1990s. As measured by educational
attainment, the qualifications of the legal profession have risen
dramatically as well. The percentage of judges with a college or
associate degree rose from 17 in 1987 to 40 in 2003. Of the 100,000
lawyers in 2002, 70 percent had undergraduate degree and better and 30
percent had only dazhuan (equivalent to an associate degree) or lower.
However, the overall level of professional legal qualification remains
relatively low, especially measured by western standards.
Table 2. Growth of Litigation, 1986-2002
(Cases Accepted by Courts of First Instance)
----------------------------------------------------------------------------------------------------------------
Year Commercial Civil Administrative
----------------------------------------------------------------------------------------------------------------
1986......................................................... 308,393 989,409 632
1990......................................................... 598,314 1,851,897 13,006
1996......................................................... 1,519,793 3,093,995 79,966
1999......................................................... 1,535,613 3,519,244 97,569
2000......................................................... 1,297,843 3,412,259 85,760
2002......................................................... \1\ 4,420,123 80,728
----------------------------------------------------------------------------------------------------------------
\1\ Including both commercial and civil lawsuits.
But behind these numbers lies a different political reality. For
all the progress in reform, China's legal system remains politically
hobbled by the ruling party's restrictions. Legal reform was apparently
losing momentum in the late 1990s. For example, the growth of civil and
administrative litigation slowed in the late 1990s, peaked by 1999, and
began to decrease afterwards. As Table 2 shows, the total number of
civil and commercial cases fell from more than 5 million in 1999 to
about 4.4 million in 2002 (a 12 percent decline over three years).
Administrative litigation cases registered even more dramatic declines.
After peaking in 2001, with 100,921 cases filed, the number of
administrative lawsuits fell to about 80,000 in 2002, back to the level
of 1996. Such broad and large declines in litigation may be indicative
of the poor performance of the court system and the consequent erosion
of the public's confidence in the courts' ability to adjudicate justly.
Although there are no data available about the trial outcomes of civil
cases, the trend of administrative litigation suggests that the decline
in the-number of administrative lawsuits filed against the government
may be directly related to the increasing difficulty with which
plaintiffs were winning these cases in courts (which in turn reflects
the courts' pro-government bias). For example, plaintiffs suing the
government had an effective winning rate of 38.3 percent (including
favorable court judgments and settlements) in 1993. This rate rose to
41 percent in 1996, but fell to 32 percent in 1999. By 2002, the rate
plummeted to 20.6 percent, half of the level reached in 1996.It is
likely that the decreasing probability of receiving judicial relief
through the administrative litigation process has discouraged many
citizens from taking their cases to the courts.
The rapid growth of the legal profession has not led to the
emergence of a genuinely independent bar or a well-trained judiciary.
The government maintains tight restrictions on lawyers in their
representation of their clients. The Lawyers' Law (1996) provides for
inadequate protection of lawyer's rights, leaving lawyers vulnerable to
harassment and persecution by local officials. According to the
president of the Chinese Lawyers Association, the number of incidents
in which lawyers were mistreated was large.Law enforcement officers
frequently assaulted, detained, and verbally abused lawyers. Many
lawyers were wrongfully convicted and sentenced to jail terms. Lawyers'
rights to defend their clients in court were restricted. Some lawyers
were ejected from courts without justification. Despite a massive
effort to raise the qualifications of judges, the overall level of
professionalism of the judiciary is very low. For example, 60 percent
of the judges in 2003 had not received a college or college-equivalent
education. A large number of sitting judges, many of whom are former
officers in the People's Liberation Army (PLA), have dubious legal
qualifications.Perhaps the most revealing evidence that the rule of law
is fundamentally incompatible with a one-party regime is the CCP's
steadfast refusal to undertake the necessary reforms to correct the two
following well-known institutional and structural flaws in the Chinese
legal system--even though they have long been identified and numerous
remedies have been proposed. For example, in a study commissioned by
the Supreme People's Court to amend the ``People's Court Organic Law,''
two leading academics detailed a long list of the symptoms that
manifested these flaws. What is remarkable about the proposal by these
two academics is that similar proposals had been floated before but
were never acted upon by the Chinese government. To the extent that
reforms are adopted to address the critical weaknesses in the legal
system, the measures implemented by the government tend to be piecemeal
and technical. They try to remedy the less controversial procedural
flaws while avoiding the most sensitive political issues.
Politicization of the Courts and Lack of Judicial Independence: As
a judicial institution, Chinese courts are heavily politicized and
deprived of the independence crucial to their role as guardians of
justice and adjudicators of disputes. The politicization of the courts
is reflected in the control exercised by the CCP over the various
aspects of the courts' operations. For example, each level of the CCP
organization (down to the county level) has a special political and
legal committee (zhengfa weiyuanhui) headed by a senior party official.
The committee directly makes decisions on important policies and issues
related to the courts and law enforcement. In many cases, this
committee even determines the outcomes of major court cases. In terms
of judicial appointments, the CCP's organization department nominates
candidates for the presidents and vice-presidents of courts (often
regardless of their judicial training or the lack thereof). In the case
of the SPC, the members of the party committee of the SPC (who are the
most senior judge-officials of the court) are appointed and supervised
by the Central Committee of the CCP, and the members of the party
committee of provincial high courts are jointly supervised by the party
committee of the SPC and the provincial party committees. The members
of the party committees of intermediate courts are under the direct
supervision of the party committees of the provincial high courts. The
CCP's control of the most senior judicial appointments profoundly
affects how judgments are determined by the courts.
Additionally, judicial independence is compromised by local
governments which wield enormous influence over the courts through
their control of judicial appointments and court finances. Dependent on
the local governments for funding, services, and political support,
Chinese courts find it hard to try cases fairly where the economic and
political interests of the local governments and officials are at
stake. In the most crucial respects, Chinese courts are run like other
government bureaucracies and follow a similar modus operandi.
Administrative ranking or seniority, not judicial qualifications and
experience, determine the hierarchical structure in the courts. For
example, trial committees, which have the ultimate authority in
determining judgments, are composed of individuals with the most senior
administrative ranks, rather than the best judicial qualifications.
Inevitably, the politicization and administrative control of the
courts corrupts judicial integrity. In public perception, the Chinese
judiciary is one of the most corrupt government institutions. A survey
of 12,000 people in 10 provinces commissioned by the CCP's Central
Discipline and Inspection Commission in late 2003 found that the
courts, along with the police and the procuratorate, were considered
among the five most corrupted public institutions (39 percent of the
respondents said corruption in these three institutions was ``quite
serious''). Chinese press frequently reports corruption scandals
involving judges. In Hubei province, from 2002 to mid-2003, 91 judges
were charged with corruption. The accused included one vice president
of the provincial high court, two presidents of the intermediate court,
four vice presidents of the intermediate court, and two presidents of
the basic-level court. In 2003 alone, 794 judges in the country were
investigated and punished (chachu). Corruption by senior provincial
judges was reported in many other jurisdictions. The presidents of the
provincial high courts in Guangdong and Hunan province were convicted
of corruption in 2003 and 2004. In Heilongjiang, the president, a vice
president of the provincial high court, and the head of the provincial
judicial department were removed from office in late 2004 for
corruption. In Hainan, a vice president of the provincial high court,
along with the head of the enforcement department of the court, a vice
president of an intermediate court, and a president of a district
court, were sentenced in 2004 to long jail terms for corruption.
Fragmentation of Judicial Authority: The control by the party and
local governments of the judiciary has contributed to the fragmentation
of judicial authority and undermined its effectiveness. In addition to
the weakening of the judiciary as a result of the CCP's control of
judicial appointments, the enormous power wielded by local governments
over the judiciary undercuts the authority of the courts. Because
judicial jurisdictions and administrative jurisdictions completely
overlap with one another, the dominance of the administrative
authorities in effect creates what Chinese observers call judicial
``independent kingdoms'' in which local political interests, instead of
national law, hold sway. Under these conditions, laws made by the
central government cannot be implemented or enforced, leading to the
widespread problem of ``local protectionism''--the phenomenon of local
authorities providing political protection to local interests in
violation of national laws. Consequently, enforcement of court
judgments is extremely difficult when judicial authority is fragmented.
In some cases, court judgments could not be executed without the
explicit political backing from CCP officials. To remedy the structural
weaknesses caused by such a fragmentation of judicial authority,
Chinese scholars have offered several proposals for institutional
reform. These proposals included the establishment of two separate
judicial systems: a central system and a local system (similar to the
American federal system), the formation of cross-regional courts, and
the use of the central government's appropriations to fund courts.
However, the government has adopted none of them. Such a failure to
implement crucial reforms led to a growing sense among China's legal
community that the court system has become so dysfunctional that more
radical measures--or ``major surgery,'' to use a colorful phrase--would
be required.
In summary, the Chinese government's lack of commitment to a
genuine system of rule of law is the fundamental cause of the
limitation of legal reform in China. The CCP's goals in allowing legal
reform are tactical in nature: such reform must serve the party's
overall strategy of maintaining its political power through economic
reform. Measures of legal reform must not threaten its authority or the
institutional structure upon which its political supremacy is based. As
long as this mindset dominates the party's thinking, legal reform in
China will unlikely lead to the emergence of the rule of law.
III. POLICY RECOMMENDATIONS
The United States can play a crucial role in promoting the rule of
law in China. Through high-level political dialogue, financial and
technical support, and consistent diplomatic pressures, the United
States government can help create the right incentives for reform
within China. In the short-term, the Administration must engage China's
new leadership in the area of legal reform. For example, President Bush
may use the two upcoming summits with President Hu Jintao to seek
specific commitments from the Chinese government in the area of
promoting the rule of law. In particular, pressures on China to take
specific actions to improve its human rights practices and protection
of property rights must be combined with offers of technical assistance
because this strategy will be more credible and less confrontational.
The United States government should also facilitate and support the
efforts of American non-governmental organizations that are
implementing various programs inside. China that are designed to
promote legal reform. Of course, we must remain realistic about the
limits of external pressure and assistance. The ultimate choice lies
with the Chinese government. But, by offering the right mix of
incentives and disincentives, we may make it more likely that Beijing
will make the right decision.
Senator Murkowski. Thank you, Dr. Pei.
Mr. Herberg?
STATEMENT OF MIKE HERBERG, DIRECTOR, ASIAN ENERGY SECURITY
PROGRAM, THE NATIONAL BUREAU OF ASIAN RESEARCH, SEATTLE,
WASHINGTON
Mr. Herberg. Thank you, Madam Chairwoman. It is a pleasure
and an honor to be here to speak to the committee.
Energy is getting to be an enormous topic when it comes to
China. We have already heard some of those questions. I think
you have to understand what is driving China's energy concerns
and what is driving China to become a major factor, both in the
region and globally, in energy markets in key areas of the
world.
The efforts come in two ways--trying to secure supplies in
different places, both in Asia and outside Asia, through equity
deals and long-term contracts--but also the attempt to control
transit routes, pipeline routes, tanker routes, as well, those
are two dimensions of that.
But I think it is important to keep in mind that China is
the catalyst in Asia for what we see as a broader Asian
scramble for energy supplies and what you can call a growing
``energy nationalism'' in Asia. They are not the only one;
Japan, South Korea, India, and some others are pursuing the
same direction.
In order to understand China's insecurity about its energy
supplies, and particularly oil supplies, a few statistics will
help. From 1985 to 1995, oil demand doubled; from 1995 to 2005,
oil demand doubled again. Imports, today, account for 40
percent of China's total oil needs, as opposed to zero just 12
years ago. If we go out in the future, with IEA forecasts or
DOE forecasts, within 15 or 20 years, China is likely to be
importing 10 million barrels of oil a day, roughly 75 to 80
percent of its oil supplies. So, this has really focused the
mind of the Chinese leadership, this kind of dependence on oil
imports. Most of this oil has to come from the Persian Gulf. A
little can come from Central Asia, Russia, and Africa, as well.
But the majority of that is going to have to come from the
Persian Gulf, through the Straits of Hormuz, the Straits of
Malacca, and the South China Sea. This whole threat, or this
perception, has really impacted the leadership. The fear is
that oil and energy shortages will undermine economic growth,
which means undermining job growth, which means undermining
social stability.
They have added concerns that I think the U.S. does not
always appreciate. From the Chinese perspective, the U.S.
controls the sea lanes of Asia, through which most of China's
future oil will come, as well as the Indian Ocean. The U.S. is
a major power in the Persian Gulf and in all the other key oil
exporting regions of the world. China feels excluded from
global oil markets and the global oil industry, which it feels
are controlled largely by the U.S. Geopolitically, the U.S. is
the power in the Gulf, as well as influences by big
international oil companies from the Western World. So, China,
on top of these other concerns, feels that it is excluded from
the geopolitics of the industry, through which much of its oil
will come in the future.
The response has been what we have talked about a little
bit earlier today--this ``going-out'' strategy--what I call
``energy diplomacy''--going out, trying to lock up supplies
throughout Asia, but also in all the key exporting areas--the
Persian Gulf, Africa, and Central Asia. You have Chinese
national oil companies in probably 25 to 30 countries right now
doing equity deals of one sort or another; some of those
countries, Iran, Sudan, and other places that we are certainly
concerned about. They are working on developing pipeline routes
from Kazakhstan, Russia, and possibly through Myanmar, as well
as trying to bypass their dependence, or at least reduce their
dependence, on the Straits of Malacca and oil coming from the
Persian Gulf.
Aligned with that is the diplomatic backup from the Chinese
Government, in terms of aid, loans, development assistance, and
other deals that come along with those energy packages. It is a
very powerful set of incentives that these countries have to
work with China on these energy security deals. The corollary
is that China has really not shown much interest in regional
cooperation and relying on markets in the region for its energy
supplies.
Another troubling aspect of China's efforts is that it
appears to be affecting their naval and military strategy in
the South China Sea and Southeast Asia, due to this concern
over the flow of all these tankers of Chinese oil in the future
coming through that area. Beijing wants to have some ability to
influence the maritime traffic in those regions, which means it
is pursuing submarines and other base access agreements in
those regions.
But I think you also have to factor in the other Asian
powers that are doing many of the same things--Japan, India,
and South Korea. In a sense, it takes two to tango. There is an
increasingly nationalistic, contentious, competitive
environment for energy supplies in Asia, which all the major
powers are participating in, and this reinforces and overlaps
the same existing geopolitical rivalries that exist in Asia
over broader political and geopolitical issues.
So energy is contributing to those rivalries and
aggravating those underlying geopolitical rivalries. The other
side of that is that those geopolitical rivalries are now
making it more difficult to solve the region's energy problems
in a collaborative multilateral cooperative way.
For the U.S., I think it is very important for U.S.
policymakers to become more engaged in Northeast Asia,
particularly, regarding the region's energy security worries,
because, without greater involvement from the U.S., it is going
to be very difficult for Northeast Asia to solve its
multilateral energy security problems.
Thank you.
[The prepared statement of Mr. Herberg follows:]
Prepared Statement of Mikkal E. Herberg
Senator Murkowski, members of the committee, thank you for this
opportunity to appear before the committee today to discuss China's
energy situation and the implications for Asia and the U.S. It is an
honor to be here.
If I may, a few words about my organization may be helpful. The
National Bureau of Asian Research (NBR), is a nonprofit, nonpartisan
research institution dedicated to informing and strengthening policy in
the Asia-Pacific. NBR conducts advanced research on security and
globalization issues, with emphasis on those of interest to the United
States. Drawing upon an extensive network of the world's leading
specialists and leveraging the latest technology, NBR bridges the
academic, business, and policy arenas. The institution disseminates its
research through briefings, publications, conferences, congressional
testimony, and email fora, and by collaborating with leading
institutions worldwide. I direct NBR's Asian Energy Security Program
which focuses on the future geopolitical, economic, energy market, and
environmental issues raised by Asia's rapidly growing energy
consumption, growing dependence imported energy, and growing reliance
on fuels sources which raise other serious problems, such as coal-and
nuclear energy.
We believe at NBR that the issues emanating from China's growing
energy needs are so important that we are organizing a small,
invitation only conference for this September here in Washington, D.C.,
entitled ``China's Search for Energy Security and Implications for the
U.S.'' We will have some of the top energy and geopolitical experts in
attendance to discuss a wide range of issues, including the outlook for
China's energy needs and energy imports, it is emerging and active
energy security strategy, the implications for Asia, and the
implications for the U.S.
Energy has become central factor in shaping China's deepening
engagement and diplomatic strategy in Asia and this is virtually
certain to grow rapidly in the future. Moreover, energy has become a
central factor in shaping China's global geopolitical and diplomatic
architecture in key oil and gas exporting countries and regions, such
as the Persian Gulf, Central Asia, Russia, Africa, and, more recently,
the Western Hemisphere. China is on a path to becoming a major player
in the geopolitics of global energy.
Given the range of vital U.S. political, economic, and energy
interests in the Asia region and in the world's key energy exporting
regions, China's energy drive will undoubtedly have important
implications for the U.S. However, at this point, it is not clear to
what extent energy, on balance, will become a source of friction and
tension in U.S.-China relations or, alternatively, a source of future
cooperation. This will be determined both by China's policies on
securing its energy security as well as on U.S. policies in response.
And it will also depend heavily on the overall ``tenor'' of the U.S.-
China relationship in the future, whether overall relations are largely
cooperative and constructive or, alternatively, competitive and
contentious. Nor is it pre-ordained that energy will be a source of
conflict in Asia, although present trends are clearly worrisome. This
too depends on both Chiria's policies and actions in Asia towards
securing its future energy needs, as well as the policies and responses
of other key states in Asia, most importantly Japan, Russia, and South
Korea. And it will depend on whether Asia manages the rise of China in
a peaceful and constructive way or China's rise is disruptive and
destabilizing. At present, energy nationalism is on the rise in Asia
with ominous implications for Asia's future, In sum, energy and
strategic relations in the region are becoming increasingly intertwined
in the wake of Asia and China's booming energy demand and growing
reliance on imported energy.
THE ROOTS OF CHINA'S ENERGY DILEMMA
First, it is important to understand the underlying context for
China's growing impact on energy markets and geopolitics. China is now
the second largest energy consumer in the world, after the U.S. Booming
energy demand growth is a reflection of its two-plus decades of rapid
economic and trade growth, urbanization, population growth, and rising
per-capita incomes. In this it is no different than the rest of
developing Asia which is also experiencing a period of extraordinary
energy demand growth reflecting its rapid economic growth and
industrialization. The primary difference is simply the sheer scale of
China's energy demand due to the size of its economy and population and
the peculiarities of China's domestic energy supply base.
Rapid demand growth is reflected across the fuel spectrum including
oil, natural gas, electricity, coal, nuclear and hydroelectric
resources. Large domestic supplies of coal have dominated domestic
energy use and coal continues to account for two-thirds of total energy
consumption. However, rapid economic growth has accelerated the pace of
oil demand growth and the government's decision to expand the use of
natural gas promises to boost future gas consumption. These
developments will boost China's future energy import dependence and
fuel its efforts to secure energy supplies in Asia and globally.
Oil is a special concern. Oil demand is rapidly outrunning China's
domestic oil resources leading to rising oil imports which have surged
over the past several years. China has been Asia's largest oil producer
since the mid-1960s, in recent years producing roughly 3.5 million
barrels per day (MMBD). However, oil demand accelerated during the
economic boom of the 1980s and early 1990s while oil production lagged.
Demand doubled between 1984 and 1995 from 1.7 million barrels per day
(MMBD) to 3.4 MMBD and has doubled again to 6.8 MMBD in 2005. China
became a net importer in 1993 and by 2003 it surpassed Japan to become
the world's second largest oil consumer behind the U.S and is now the
third largest oil importer behind the U.S. and Japan. China now imports
more than 40 percent of its total oil needs.
China's leadership has responded with both energetic domestic
reforms and aggressive global energy security policies. Domestically,
efforts are underway to maintain production in the traditional
northeastern oilfields while boosting production in western China where
prospects for growing production are better, the so-called ``stabilize
the East, develop the West'' policy. Offshore oil development also has
been a high priority in both the South China Sea and East China Sea,
although with relatively modest results. The domestic oil industry also
has been repeatedly restructured to try to boost competition and
efficiency and oil pricing has been brought more closely in line with
global and regional oil markets.
Nevertheless, domestic oil production is unlikely to rise
significantly in the foreseeable future while there is a widely held
consensus among energy forecasters that oil demand, and therefore
imports, are very likely to continue growing relentlessly. The TEA
forecasts that China's oil imports will rise more than five-fold by
2030, from slightly under 2 MMBD in 2002 to nearly 11 MMBD, when
imports will account for 80 percent of China's total oil needs.\1\ The
leadership now faces the long-term realization that oil import
dependence is unavoidable and will grow. Moreover, as in the rest of
Asia, China will become heavily dependent on the Persian Gulf for
future supplies and its oil will increasingly have to transit a series
of vulnerable maritime choke points. The East-West Center forecasts
that by 2015, 70 percent of China's oil imports will come from the
Middle East. Other significant shares of China's oil imports will come
from Russia by pipeline and rail, from Central Asia by pipeline, and
from Africa by tanker.
---------------------------------------------------------------------------
\1\ International Energy Agency, World Energy Outlook, 2004, OECD,
Paris.
---------------------------------------------------------------------------
Electricity demand has also accelerated. in recent years forcing
the government to scramble to find fuels to generate more electricity.
Rising electricity demand is the key driver behind China's heavy
reliance on its largest domestic energy resource, coal. China is the
largest producer and consumer of coal in the world and coal accounts
for over 80 percent of electricity generation and accounts for two-
thirds of China's total energy use. Coal consumption is expected to
double over the 2001-2025 period with truly frightening environmental
and health implications. China is also expected to account for one-
quarter of the world's CO2 emissions over that period.
Although presently a modest net coal exporter, it is likely to become a
net importer of coal as early as 2015.
The electricity demand boom is also driving plans for the largest
single country nuclear power building program in the world. China plans
to build two large nuclear plants per year over the next 20 years.
Extensive hydroelectric development is planned for the future, as well.
Policies are also being developed to accelerate the use of renewables,
such as solar and wind, but these will only make a small dent in the
electricity demand curve even under the most optimistic of forecasts.
China is-presently largely self-sufficient in natural gas but this
is only because it uses so little: gas represents less than 3 percent
of China's total energy consumption compared with a global average of
23 percent. However, the government has embarked on an aggressive
policy to increase gas use to help replace coal to generate
electricity, diversify overall commercial and household energy use, and
provide cleaner-burning fuel for environmental needs. Current plans
call for gas to make up 8-10 percent of total energy demand by 2020.
The government is accelerating domestic natural gas exploration and
development and expanding the national pipeline system to transport
more gas from fields in north central and western China to the major
cities on or near the east coast. A major 2,500 mile west-east gas
pipeline has just recently been completed to move natural gas from the
sparsely populated Xinjiang Uyghur Autonomous Region to Shanghai. The
government also is working to develop gas markets by creating more
effective regulatory structures and increasingly flexibility in the gas
pricing system.
Over the long-run, although gas is an important element of China's
overall energy needs and environmental concerns, it also will add to
dependence on energy imports in the future. Beyond 2010 demand is
likely to begin to outrun domestic production. China's first gas
imports will commence in 2007, with the opening of a Liquified-Natural
Gas (LNG) import terminal in Guangdong Province, with plans for a
string of LNG terminals along China's booming coastal region. The DOE
forecasts that imports will account for 40 percent of China's gas needs
by 2025. LNG supplies will come largely from Asia, including Australia,
Indonesia, Malaysia, Brunei, and East Timor, but China will also likely
rely on a growing volume from the Persian Gulf, including Qatar, Iran,
Oman, and probably Yemen. China is also likely to import gas via
pipeline from Russia's East Siberian Irkutsk or Sakha regions where a
large regional gas pipeline scheme is being planned. Consequently, a
significant portion and will have to be transported largely from the
same volatile regions as oil imports, namely the Persian Gulf and
Russia.
In sum, despite significant efforts to stimulate domestic energy
production China faces an inevitable trend toward greater energy import
dependence to fuel its dynamic economic growth. Import dependence will
be most acute for oil but will become a growing concern over the longer
term for natural gas supplies. Moreover, electricity needs are driving
China towards fuel choices with serious environmental, safety, and
nuclear non-proliferation implications for the region and the U.S.
CHINA'S GROWING ENERGY INSECURITY
China's rapid economic growth is highly dependent on finding the
growing energy supplies needed to fuel this economic ``Dragon.'' The
erosion of the ability to rely largely on domestic energy supplies has
created a powerful sense of energy insecurity rooted in a deep-seated
fear among the leadership that energy supply disruptions and
unpredictable price spikes could undermine China's rapid economic
growth and job creation. To the leadership, slow economic and job
growth raise the real specter of social instability which, in turn,
calls into question the continued power and political control of the
Communist Party. Hence, there is a visceral and profound connection in
the minds of the leadership between reliable energy supplies, political
and economic stability, and continued Party control.
In this context, energy has become a matter of ``high politics'' of
national security and no longer just the ``low politics'' of domestic
energy policy. Energy security is too important to be left entirely to
the markets as China's economic prosperity is increasingly exposed to
the risks of global supply disruptions, chronic instability in energy
exporting regions, and the vagaries of global energy geopolitics.
Energy has become a central concern for Beijing and the global search
to secure future energy supplies has taken on great urgency.
The events of 9/11, the Global war on Terrorism, and the wars in
Afghanistan and Iraq have heightened this sense of insecurity and
vulnerability. First, China is increasingly concerned about the risks
of potential terrorist attacks on energy infrastructure and attacks on
key maritime transit points like the Straits of Malacca.\2\ More
broadly, from China's perspective, the aggressive U.S. response to the
attacks on America risk further destabilizing the Persian Gulf and
Central Asia and increasing the risks of supply disruptions, worsening
Islamic extremism, and political instability. Moreover, China views the
U.S. as a long-term strategic competitor meaning that the deeper
extension of U.S. military power and influence in Central Asia and the
Persian Gulf aggravates their already significant fears of strategic
``encirclement'' by the U.S. The U.S. dominates the Persian Gulf, from
their point of view, and uses this to maintain control over global oil
supplies and geopolitics. The U.S. navy dominates the Sea Lines of
Communication (SLOC) in Asia and the Indian Ocean through which a
growing share of China's oil supply will flow in the future. These
things aggravate their fears over what they view as U.S. global
``hegemony'' and increases the sense of vulnerability over oil and gas
flows vital to China's long-term strategic room to maneuver, its
economy, and its social stability. Their fears over U.S. control of the
sea lanes coalesce most clearly in their deep concerns that the U.S.
would cut off their oil imports during any confrontation with the U.S.
over Taiwan.
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\2\ The two major chokepoints for Asia's supplies are the Straits
of Hormuz exiting the Persian Gulf and the Malacca Straits between
Indonesia and Malaysia entering the South China Sea. In 2003 roughly 15
million barrels of oil per day (MMBD) passed through the Straits of
Hormuz, with around 10 MMBD of that headed to Asia through the Straits
of Malacca. Another 1 MMBD passes through the Straits of Malacca from
Africa. As a result, more than 50 percent of Asia's daily oil supplies
must transit the narrow Malacca Straits. See ``World Oil Transit
Chokepoints,'' Energy Information Administration, U.S. Department of
Energy, April 2004.
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A variety of other factors aggravate this sense of insecurity.
China has a strong sense of exclusion from the global energy management
institutions, such 'as the TEA, and also sees itself as dependent on
global oil markets and a global oil industry that. is dominated by the
U.S and the major international oil companies of the industrial
countries. Also, high oil prices and a growing fear of long-term global
oil supply ``scarcity'' are feeding this sense of insecurity and the
compulsion to try to unilaterally secure its future oil and gas needs
in Asia and elsewhere by direct state intervention.
China is responding with a broad range of energy strategies
internationally to try to guarantee greater supply security and reduce
their vulnerability to potential supply and price shocks. On balance,
these efforts reflect a ``zero-sum'' energy supply strategy which is
deeply neo-mercantilist and competitive. It is built on efforts to gain
more secure direct national control of overseas oil and gas supplies by
taking equity stakes in oil and gas fields, promoting the global
expansion of the three national oil companies, CNPC, Sinopec, and
CNOOC, and promoting development through state-to-state deals of new
oil and gas pipelines to channel supplies directly to China. The
government is also employing an active ``Energy Diplomacy'' by
developing broader government-to-government diplomatic, trade,
financial, economic aid, and military ties with key exporter
governments, promoting energy cross-investments between China and key
exporters, and beginning to shape its naval and maritime military
strategy to try to protect the SLOCs from the Persian Gulf and through
the South China Sea to China. These efforts naturally converge on.the
Persian Gulf, Central Asia, Russia, Africa, Latin America, and,
recently, Canada. For example, the Chinese government has signed
``Strategic Energy Alliances'' with at least eight countries over the
past five years which include a varying mix of energy, trade, aid, and
military agreements depending on the case.
IMPLICATIONS FOR ASIA AND THE U.S
China's energy security drive is likely to significantly impact
Asia and broader global developments in a number of ways which could
become of concern to the U.S.
One set of concerns revolves around the growing perception that
China's booming oil demand and oil imports are driving the recent sharp
rise in world oil prices and, by implication, that U.S. oil consumers
are paying the price for China's outsized demand growth. While China's
oil demand growth, particularly in 2004, when demand rose by 14
percent, has been a key factor in recent price hikes, it is only one of
a number of factors. Even in 2004 China only accounted for roughly 30
percent of the world's enormous demand growth of 2.8 MMBD, about the
average for China's share of global growth over the past decade. From
2000-2004, the growth in China's oil imports has been only slightly
larger than the U.S., 1.5 MMBD vs. 1.3 MMBD for the U.S. Oil demand
growth has been strong globally since the economic recovery began in
mid-2003. In the view of many, the most important factor in today's
high oil prices is the. lack of increases in global oil production
capacity in recent years to meet rising demand. The lack of global
spare production capacity is the critical issue. Other issues like the
lack of spare capacity in the global refining system are also central
to today's high prices.
A corollary to this concern is the widespread notion that the U.S.
is increasingly ``competing'' with China for its oil imports. However,
this makes little real sense: the U.S. is no more competing with China
for its oil than it is competing with Germany or any other large oil
importer. There is only one global oil market and prices and supplies
equilibrate every nano-second responding to demand, transportation
costs, and quality differentials.
Another aspect of this oil competition issue may be of more
concern. One element of China's mercantilist oil strategy is to gain
direct state company control over equity oil production in key
exporting countries to ship directly to China rather than moving it
into the global market, as most international oil companies would do.
To the extent China succeeds in the future in turning certain countries
into their own personal ``gas stations,'' it risks reducing the
flexibility of global oil markets to adjust to sudden supply shocks or
demand surges. The industrial world learned during the 1973-74 oil
shock that a zero-sum scramble for oil supplies during a crisis simply
worsens the problem by reducing market flexibility and efficiency and
intensifying national conflicts over supplies. This led to the creation
of the IEA to avoid the risks of national competition for supplies that
only drive prices higher and accentuate scarcity. U.S. policy since
then has focused on promoting diversified sources of oil supplies to
flow to the global market, letting the market determine the most
efficient allocation of those supplies.
A second set of important concerns over China's energy security
strategy revolve around the potential impact on Asian geopolitics and
stability. China's increasingly mercantilist strategy to assert control
of oil and natural gas supplies and transport routes risks fueling
tensions and conflict in a region where the lack of regional
institutions to manage conflict is already a major problem and a region
which is facing a sensitive transition to accommodate China's rising
power over the next two decades. Energy competition is beginning to
seriously aggravate existing and, in some cases, deepening rivalries
between China and her neighbors. For example, China and Japan are
currently locked in long-running and potentially highly combustible
diplomatic battles over the routing of a proposed East Siberian oil
pipeline that would move oil to Asia, and the ownership of a small
offshore natural gas field in the East China Sea between China and
Japan. These disputes are combining with other political and diplomatic
disputes between the two to sharply worsen the overall state of
relations. Nevertheless, this is not just China's problem alone. A
virulent form of energy nationalism is taking form in Asia today that
threatens to aggravate Asia's underlying national rivalries. Each of
the major Asian states, China, Japan, India, South Korea, and
increasingly some of the Southeast Asian states, are pursuing a largely
mercantilist, nationalistic, competitive approach to securing future
energy supplies and transit routes. This is preventing development of
more cooperative and market-oriented approaches to the region's common
energy security problems. The United States has major strategic and
economic stakes in how China responds to its energy insecurity and how
this impacts Asian stability and geopolitics.
Another dimension of China's energy insecurity that is of concern
to Asia and the U.S. is its impact on China's military and naval
strategy. The growing volume of oil that will be flowing to China by
tanker through the Indian Ocean and South China Sea appears to be
driving efforts to develop naval capabilities and arrangements that
would allow it to project its impact well beyond the Taiwan Strait.
China has been developing a major submarine capability and potential
port access agreements with Pakistan, Bangladesh, Myanmar, and the
South China Sea which appear aimed at protecting future Chinese oil
tanker routes. In this sense, China's energy insecurity risks
aggravating the potential future problem of military maritime
competition to control the Sea Lines of Communication in Southeast
Asia.
A third area of real concern for the U.S. beyond Asia comes from
the fact that energy needs inevitably will propel China to become a
major player in the world's key oil and gas exporting regions and in
global energy geopolitics. There are a series of issues here. The most
immediate concern is China's growing energy investments and alliances
with a number of problem states, including Sudan, Iran, Myanmar,
Venezuela, and Uzbekistan. In the case of Sudan and Iran, China's
involvement is helping to undermine U.S. sanctions (although China is
among a number of countries doing so) and is also complicating U.S.
efforts in the United Nations. For example, China is the prime
roadblock to taking Iran to the Security Council for sanctions over its
nuclear program. Efforts to sanction Sudan for its human rights
violations in the Darfur region are also stymied by China's opposition.
Sudan happens to be China's largest foreign oil investment operation.
China is on its way to greater involvement in Myanmar, recently signed
a major energy investment deal with Uzbekistan, and has signed a
Strategic Energy Alliance with Hugo Chavez and Venezuela.
A second set of issues is likely to arise from what inevitably will
be China's greater diplomatic and political involvement in. the Persian
Gulf and Middle East in the future. China will become a major
competitor for political influence in the Persian Gulf and the U.S.
will increasingly need to come to grips with growing diplomatic and
political ties between the key Gulf states and China, particularly
Iran, where China is increasingly active. For their part, the key Gulf
states are increasingly turning to growing diplomatic ties with Asia
and China as their base of oil exports to Asia grows. Already, nearly
two-thirds of the Gulf's oil exports go to Asia and this share will
grow. The Gulf states are increasingly looking to balance their ties to
the U.S. with ties to China. As the traditionally dominant outside
power in the Gulf, the U.S. will find its regional diplomacy becoming
even more complex.
Similar issues are likely to arise in relation to Eurasia as China
deepens its long-term energy ties with Russia and the energy exporting
Central Asian states. China's push to develop the Shanghai Cooperation
Organization bringing together the key states of Eurasia is in no small
part driven by its desire to forge stronger energy ties and more secure
future supplies, particularly from Kazakhstan. China has major oil
investments in Kazakhstan and is currently building a large oil
pipeline from Kazakhstan to western China.
China's energy needs, along with the rest of the large Asian oil
and gas importers, are also inexorably drawing Russia back into Asia as
a key strategic and commercial player with a range of potentially
important implications for U.S. interests in Asia and for future U.S.
relations with Russia. Energy has the potential to strengthen long-term
ties between China and Russia. However, this has not really happened
yet due largely to Russian fears over China's growing regional power
and fears that Russia's Far East region may be overrun in the future by
Chinese economic power, influence, and population growth. Consequently,
despite a series of strategic energy agreements between the two
countries, Russia has largely frustrated China's efforts to forge major
new energy deals and diplomatic ties. The most obvious case of this was
Russia's announcement that it would build the planned East Siberian oil
pipeline to the Pacific Coast where it would export oil to Japan and
the rest of Asia, rather than live up to its previous agreement with
China to build the pipeline to Northeastern China.
A fourth set of concerns over China's growing electricity needs
arises from the environmental and nuclear safety and proliferation
issues coming from China's rising consumption of coal and its major
nuclear energy building program. China's coal consumption is expected
to roughly double over the next 15 years. This raises a range of
serious environmental and health concerns not just for China but for
the region and the U.S. Acid rain from China's coal burning is already
a major problem in Northeast Asia causing diplomatic tensions with
Japan and South Korea. From the U.S. perspective, there is already
evidence of mercury from China's coal burning being drafted by the
jetstream all the way to North America. As coal consumption grows,
these concerns are likely to rise. Moreover, rising coal consumption
along with booming oil consumption will make China the largest source
of carbon dioxide emissions globally in the future which raises serious
concerns about the effectiveness of any global effort to deal with
controlling carbon emissions.
POLICY ISSUES FOR THE U.S.
China's booming energy demand and growing energy insecurity are
likely to deeply impact China's role in Asia and globally, with some of
these impacts having serious implications, for Asia and the U.S.
There are several general policy areas that U.S. policymakers need
to begin thinking about. First, U.S. policymakers need to step up
efforts to help China improve energy efficiency and slow the rise in
consumption which is underlying China's insecurity. This needs to
proceed at the highest level. Second, the U.S. needs to look for ways
to bring China into the global emergency oil sharing system currently
dominated by the IEA, which, since it can only include members of the
OECD, by definition excludes China. This again requires a senior policy
level effort. China is presently beginning to build its own strategic
oil reserves in four locations along the eastern coast, But it is vital
that its efforts to build and use strategic reserves be coordinated
with IEA and western strategic reserves to maximize their effectiveness
during any supply crisis. Third, the U.S. needs to aggressively seek
ways to build regional energy institutions in Asia to facilitate
multilateral energy projects and encourage regional cooperation over
competition. APEC is not an effective forum for this, nor is the ASEAN
Regional Forum (ARF). New institutions need to be built and the U.S.
needs to be involved in this. Without U.S. involvement, the risks are
rising that nationalistic competition for energy supplies and naval
control over transit routes could lead to serious political and
military tensions among Asia's key powers. Fourth, U.S. policymakers
need to begin planning for managing and channeling China's growing
diplomatic and economic influence in the world's key energy exporting
regions, most importantly the Persian Gulf and Middle East. Fifth, the
U.S. needs to become more active in helping China find alternatives to
rising coal consumption to meet its electricity needs and to support
technology and investment to help China burn coal more efficiently and
cleanly.
China's booming energy consumption will drive a number of important
energy, environmental, and diplomatic challenges in the future for Asia
and for the U.S. It is vital that U.S. policymakers at the highest
level begin to engage China on these issues and seek creative ways to
avoid a growing set of looming challenges outlined here.
Senator Murkowski. Thank you.
Dr. Dalpino?
STATEMENT OF CATHARIN E. DALPINO, ADJUNCT PROFESSOR OF
SOUTHEAST ASIAN STUDIES, EDMUND A. WALSH SCHOOL OF FOREIGN
SERVICE, GEORGETOWN UNIVERSITY, SCHOOL OF ADVANCED
INTERNATIONAL STUDIES, JOHNS HOPKINS UNIVERSITY, WASHINGTON,
D.C.
Professor Dalpino. Thank you, Madam Chair.
I am here to speak on the Southeast Asia part of this
puzzle. In the past 15 years, China has made dramatic strides
in increasing its influence and presence in the region, and, as
you noted in your introductory remarks, this is, in part,
because of the natural consequences of its economic rise, and
also because of very carefully crafted strategies.
In 2005, it is quite possible that ASEAN's trade with China
will eclipse its trade with the United States, and China will,
for the first time, be the major economic power in the region,
the first time since 1873. This, alone, might not necessarily
be a cause for concern, but I think there are two issues that,
really, we need to look at in China's new relationship with
Southeast Asia.
First is whether, in outdistancing the United States as an
economic power, as China might, there might be a gravitational
pull towards an Asian economic community that would exclude the
United States. And this would not simply be a function of
Chinese/Southeast Asian relations, but of the broader region.
And, second would be China's overwhelming influence in the
poorer states of Southeast Asia--and those would be Laos,
Burma, and Cambodia--and whether we should cede those countries
to China as client states.
Both countries, China and the United States, have
considerable strengths and considerable presence in the region.
Certainly, the United States security umbrella is very
important, and I would argue it is even important to China's
development in Southeast Asia. It allows it to have the kind of
relationship that it does have. Our markets are also very
important. Most of the exports that Southeast Asia sends to
China are raw goods. Most of the exports it sends to the United
States, besides textiles, are in high-tech manufactured goods.
And so, we are going to remain an important market.
China's aims in its economic strategy towards Southeast
Asia are primarily to fuel development, particularly of the
southern province of Yunnan. And, in that sense, it needs
energy, it needs raw goods. It is a pressure valve for
migration. There is considerable migration into the northern
states of Southeast Asia. China is changing the physical face
of Southeast Asia through road-building and also through its
dams on the Mekong, and it is blasting the shoals of the Mekong
to widen it for barges to go through.
Southeast Asia's aims in this new economic relationship are
to recoup much of the income, or some of the income, that it is
losing to China--in part, as a result of China's entry into the
WTO. Some economists believe that, over the next 15 years,
Southeast Asia can lose as much as 400 billion in FDI to China.
And so, the increase in trade obviously is very strategic on
Southeast Asia's part.
China's ultimate intentions in Southeast Asia are unclear.
And most Southeast Asian governments tend not to see China as a
predator at this point, tend to see it as a benign power, at
least for the time being. The stronger, older states of ASEAN--
Thailand, Indonesia, Singapore, and Malaysia--are confident
that they can balance relations between China and the United
States. The Philippines is still very close to the United
States. Our treaty ally is embarked upon a new strategic
dialogue with China, it is a process of re-balancing, but I do
not think that we have a lot to worry about in that.
Because of its history, Vietnam is pursing an
omnidirectional foreign policy. It aims to have relations with
all the world's powers. It maintains that it is not seeking a
counterweight of one against the other. And, as I said before,
the real imbalance is in these poorer states.
In terms of security, China has been slower to develop
relations with Southeast Asia, but recently it has improved in
reduced tensions in the South China Sea. It is an arms vendor.
Malaysia and China recently concluded an agreement for midrange
missiles. And, also, it is taking a role in regional security.
It chaired the first security conference of the ASEAN regional
forum last year.
Let me just point out two strategies China has. And one is
to offer absolutely unconditional aid to Southeast Asia, in
comparison to United States aid. And last year the United
States had sanctions against seven out of ten Southeast Asian
countries, or the threat of them. And this--certainly the
countries took note.
The second is that China takes a more regional approach to
Southeast Asia than the United States does. It interacts more
with ASEAN. And the greatest example of this is the ASEAN/China
free trade area, which is--only exists in principle at this
point, but, if it comes to fruition by 2015, will be the
largest free trade area in the world.
There are, I think, numerous things that the United States
can do to protect our interests and to make sure that our
influence is safeguarded.
First of all, we can, through our own trade policies,
participate more in regional integration in Southeast Asia,
because that will keep us in the mix. And that would mean
either stepping up the enterprise for ASEAN initiative or
perhaps pushing more on the Doha round, which would have an
integrative effect, but not divert trade as much as bilateral
FTAs would.
We should help Southeast Asians think about the next
financial crisis, and perhaps offer a second line of defense
for currency--severe currency fluctuations. On a bilateral
basis, we were not particularly well loved during the 1997-98
crisis, because we put most of our support through the IMF.
In terms of security, I think that we could be more active
in ARF, as well. We tend to have APEC as our go-to regional
institution. I do not think we want to cede that sort of a role
to China, although both China and the United States are just
dialogue partners in ARF.
I think we can also promote triangular cooperation on
nontraditional security threats between China and the United
States and Southeast Asia--epidemics, trafficking of all
sorts--which would signal that we do see China as a potentially
benign power, but also set up some tracks for cooperation.
We can also pursue our own very cautious and incremental
policy in multilateralizing security in the region. And that
has taken place mostly through our broadening the Cobra Gold
exercises in Thailand. And I would note that China has been an
observer to those exercises.
I think it is important that we not exacerbate the gap
between the rich and poor countries in Southeast Asia, and that
we do improve our ties with the newer members of ASEAN. And
there are any number of things that we can do in that regard.
The Tariff Relief Assistance for Developing Economies Act,
which is before both the Senate and the House for consideration
this year, would boost trade with Cambodia and Laos, and it
would help cushion some of the blow of the abolition of the
textile quotas.
I do believe, with Vietnam, it is important to solve the
political issue of Agent Orange. That is one that the
Vietnamese care very much about, and we have not really given
it sufficient attention.
And I think that by national public/private educational
foundations with Laos and Cambodia, we do quite a lot, as well.
Education is, as you noted, an increasing problem. There is an
educational pull towards China. In 2004, twice the number of
Indonesians got visas to study in China as got visas to study
in the United States. And so, that is going to be an increasing
problem that we should think about, seeing education as a
quote/unquote ``hard'' area of policy, rather than a soft one,
as it traditionally is.
And, lastly, I think we need to be careful not to over-rely
on surrogates in Southeast Asia. We tend to view Japan,
Australia, and perhaps even India as carrying our water in the
region at times. I think that would be a mistake. All of those
countries have a great deal of commonality with the United
States on some issues, not on some others, but we really do
need to maintain our own profile in the region through high-
level visits, both in the executive and the congressional
sides.
And I would just point out that we recently had a meeting
in Bangkok on U.S. policy in Southeast Asia, and one of the
points that was made by some of the Southeast Asian leaders is,
they would like to see more Senators in the region come out on
CODELs.
[The prepared statement of Professor Dalpino follows:]
Prepared Statement of Catharin E. Dalpino
Thank you for this invitation to appear before the committee to
discuss China's emergence in Asia and its impact on U.S. relations with
Southeast Asia. My views on this subject are informed by my work as an
adjunct professor of Southeast Asian politics, security and
international relations at Georgetown University and The George
Washington University. In addition, I co-edit the Georgetown Southeast
Asia Survey; direct the Stanley Foundation's project on ``Southeast
Asia in the 21st Century,'' and consult with the Fund for
Reconciliation and Development, which work in the countries formerly
known as Indochina. Some of the findings and recommendations in this
statement are derived from research conducted by these groups related
to China's role in Southeast Asia.
Without doubt, China has increased its reach and influence in
Southeast Asia dramatically y in the past fifteen years. This is an
inevitable consequence of its emergence as a global economic power, but
is also the result of carefully crafted Chinese policies which couple
geopolitical interests with economic incentives and opportunities in
Southeast Asia, bound together by a vigorous diplomatic campaign. It is
a matter of genuine debate whether China's new role in Southeast Asia
supports or threatens American interests in Southeast Asia. The United
States wants Southeast Asia to be prosperous and stable, and that
requires China's active involvement in the region.
The issue is whether China is on a trajectory to outdistance the
United States in the region's economic affairs, as well as in political
and security relations with specific countries. Southeast Asia's trade
with China is its fastest growing economic relationship, and in 2005
the volume of ASEAN-China trade may eclipse that with the United
States. This will make China Southeast Asia's most important trading
partner for the first time since 1573. Indeed, some economists believe
that this is the restoration of a very old pattern of Asian economics
and trade, with China reclaiming the central role it held before the
colonial era.
China's ultimate intentions toward Southeast Asia are unclear. Many
Southeast Asians dissent from a predatory view of China's new
relationship with the region. The public posture of ASEAN governments
is to express confidence that China's intentions are benign, and that
it will over time prove to be a responsible power in the region. They
do not credit the present generation of Chinese leadership with either
the ability or the inclination to pursue broad, strategic aims in the
region in a deliberate fashion. There is considerable evidence to
support this view at the present time. The exception to this is China's
relationship with Burma. ASEAN's apprehension over growing security
ties between Beijing and Rangoon contributed to its decision to admit
Burma into ASEAN in 1997, in the face of strong resistance from the
United States.
More to the point, Southeast Asian as a whole does not want to be
the object of competition between the United States and China. The
larger and richer states in the region--Indonesia, Thailand, Singapore,
and Malaysia--will be able to balance relations between the two
countries well into the future. Because of its history, Vietnam has
taken a particularly studied approach to developing relations with
global and regional powers. Hanoi seeks an omni-directional foreign
policy and it is adamant that it is note attempting to use one power as
a ``counterweight'' against another. Relations between the U.S. and the
Philippines, a treaty ally, have strengthened measurably since the
September 11 attacks, at the same time, Philippine-Chinese relations
have also expanded. Late last year the Philippines entered into a
``strategic dialogue'' with China when President Arroyo made her first
state visit to Beijing. If there is an obvious imbalance, it is in
China's relations with the poorer countries of mainland Southeast Asia.
In recent years Beijing has quickly established itself as the primary
economic patron in Burma, Laos and Cambodia, and as Rangoon's closest
political partner.
The United States and China bring different strengths to their
relations with Southeast Asia. Although China has improved security
relations with Southeast Asia, it cannot supplant the United States as
the security guarantor for the region. The tsunami relief effort
demonstrated the rapid response capability of the U.S. military, and
U.S. economic aid to the region was ten times larger than China's
contribution. However, it would be a mistake to view the tsunami effort
through the lens of triumphalism. China's role in the relief
represented its first major international humanitarian effort, and
Beijing received credit from Southeast Asia accordingly.
Beyond its market for exports, China has location on its side. Its
proximity to Southeast Asia enables Beijing to dispatch an ``A team''
of leaden to the region on short notice. Diplomatically, Premier Wen
Jiabao holds the ASEAN portfolio. Moreover, ethnic Chinese in Southeast
Asia, whose numbers are vaguely estimated at 20 to 40 million, have
helped open economic and political doors with China for their adopted
countries, China also has cultural roots in common with many Southeast
Asian societies, which extend to popular culture in the present day. In
many younger generation Southeast Asians, kung fu easily tops hip hop.
These factors combine in Chinese policy to stress the ``family''
aspects of China's relations with Southeast Asia, which the United
States cannot as easily claim.
THE CENTRALITY OF TRADE
Questions of immediate and serious competition with China in
Southeast Asia pertain to trade. Although the United States has made
considerable strides in trade with Southeast Asia in recent years,
China has pulled ahead much more quickly. The underlying issue is
whether such a pattern represents a gravitational pull toward an Asian
economic community that excludes the United States. This is underscored
by China's agreement with ASEAN to form a regional Free Trade Area by
2015. While still in the early stages, if it is completed the China-
ASEAN FTA would be the world's largest free trade area.
To be sure, ASEAN has strong interests in maintaining high levels
of trade with the United States. Most Southeast Asian exports to China
are in raw materials, while the U.S. is the established market for more
high tech manufactured goods. Moreover, the United States is
theoretically working toward a concert of free trade agreements in the
region through the U.S. Enterprise for ASEAN Initiative, a ladder of
steps intended to culminate in FTA's with each Southeast Asian country.
However, these ladders are too steep for the weaker economies of the
region, and FTA's with the U.S. are not tangible possibilities.
China's primary goal in its trade with Southeast Asia is to use the
region's natural resources and markets to fuel domestic Chinese
development, particularly in the southern province of Yunnan, which
borders Southeast Asia. In Burma and Laos in particular, much trade is
private and local and therefore likely to be underreported. Migration
into these countries accompanies the increase in trade, particularly in
the northern half of Burma, which some analysts have dubbed ``Yunnan
South.'' Chinese trade is also changing the physical face of mainland
Southeast Asia, as roads are built in Laos to connect China to
Thailand, and as China builds dams on the Mekong for energy and widens
the river's shoals to permit barges to pass through. Southeast Asian
NGO's and some governments are beginning to question the ecological
costs of this process, but have few levers against Beijing to control
it.
For its part, Southeast Asia views increased trade with China as an
opportunity to recycle some of the trade and foreign direct investment
the region has lost to the economic giant to the north, especially
after China entered the world Trade Organization. Some analysts
forecast that Southeast Asia could lose as much as $400 billion to
China, over the next 15 years. It is unlikely that the proposed China-
ASEAN FTA will stem that loss to a great degree, indeed, there are
likely to be economic dislocations that come with economic integration
with China. Beijing has set 2010 as the target date for the reduction
of tariffs with the original six ASEAN states, and 2015 for the four
new members. However, early experience is showing that Chinese goods
can overwhelm indigenous products in Southeast Asian markets. In
Thailand, as the result of an agreement with China on fruits and
vegetables, a kilo of Chinese garlic costs 5 baht (15 cents), versus 35
baht ($1.05) for a kilo of Thai garlic.
SECURITY SHIFTS BELOW THE RADAR
China's intentions toward Southeast Asia appear to be
overwhelmingly commercial at this time. However, this does not negate
an increased interest in security in the region. Chinese leaders view a
stable external environment as essential to achieving their internal
economic and political objectives. In that regard, Beijing has
attempted to project the image of a responsible power in Southeast
Asia, and has taken steps in recent years to reduce tensions over the
Spratly Islands in the South China Sea. Improved security with
Southeast Asia also facilitates trade with the region, although greater
dependence on Southeast Asia's energy and raw materials also creates a
greater security imperative for China.
Beijing has been slower to improve security relations with
Southeast Asia than diplomatic or trade ties. In 1992, after the
withdrawal of U.S. bases from the Philippines, China issued a
unilateral claim of sovereignty over the South China Sea. This policy
resulted in a clash with the Philippines over Mischief Reef in the
Spratlys in 1995. The incident was a red flag to both China and ASEAN
that tensions over the Spratlys could derail broader progress in
relations. In 2002, China and ASEAN negotiated a Declaration on the
Conduct of Parties on the South China Sea, which called for greater
consultative mechanisms. The Declaration had echoes of Chinese rivalry
with the United States, however, when Beijing tried unsuccessfully to
get ASEAN to agree to forbid foreign military exercises in the region.
In the past year, Beijing has further reduced tensions by inviting
Vietnam and the Philippines to join it in exploration of oil resources
on some of the disputed Spratlys, although such cooperation did not
include the renunciation of competing claims.
More generally, Beijing has recently been forward-leaning in
regional security. In November 2004 China hosted first the Security
Policy Conference of the ASEAN Regional Forum (ARP), attended by
defense officials from twenty-four Asian countries.
Not surprisingly, China also presses Southeast Asian governments to
purchase military equipment. Although some Southeast Asian defense
communities see Russian equipment as the alternative to American, China
has realized some success. Last year Beijing and Kuala Lumpur
negotiated a deal for Malaysia to purchase mid-range missiles from
China.
Southeast Asians are very frank in making clear their views that
they do not fear a unilateral security threat from China, but they do
fear the inherent threat in a military conflict between China and the
United States, which they presume would occur over Taiwan. All of the
Southeast Asian states follow a ``one China'' policy, although Taiwan
has significant investments in the region, particularly in labor-
intensive sectors. Southeast Asia occasionally feels the edge of this
threat. For example, last year Beijing sharply rebuked Singapore when
then-Deputy Prime Minister Lee Hsien Loong made an unofficial visit to
Taiwan.
CHINA'S ``CHARM OFFENSIVE'' AND THE IMPORTANCE OF OPTICS
At a time when the United States worries about its image abroad,
particularly in the Muslim world, China has mounted a wing diplomatic
campaign in Southeast Asia. The primary purpose of this was to
normalize relations with the ten countries of the region, which Beijing
has accomplished, although there are significant differences among the
ten in closeness to Beijing and levels of trust.
Although China and the United States are not in open strategic
competition with one another in Southeast Asia, China has learned to
capitalize on openings the U.S. has left in the region. In 1997, when
the U.S. failed to offer bilateral bail-outs to Southeast Asian
countries hit hardest by the economic crisis, Beijing offered those
states the first Chinese bilateral loans in the region. In 2003, after
the United States tightened sanctions against Burma in the wake of Aung
San Su Kyi's rearrest, Beijing gave Rangoon a grant of $200 million to
help cushion the economic loss.
Beijing employs two additional strategies that occasionally give it
advantage over the United States. Chinese aid to Southeast Asia is
conspicuously unconditional. This creates a contrast to perceptions of
American aid, which are often entangled with sanctions and other
conditionalities. In 2004, seven out of ten Southeast Asian countries
were under U.S. sanctions or the threat of sanctions. Indeed, there
were signs of a revival of the ``Asian values'' debate of the 1990's,
when Beijing successfully lobbied to include Burma in the Asia-Europe
Meeting last year, against the objection of some EU governments.
Another advantage is Beijing's regional approach to Southeast Asia.
Although China has been scrupulous in developing bilateral ties, it
also deals with ASEAN as a regional group to a greater degree than does
the United States. This is seen not only in the China-ASEAN FTA, but
also in Beijing's accession to the Treaty of Amity and Cooperation
(TAC), one of the founding ASEAN treaties. Japan, India and Russia have
also signed the TAC, and ASEAN has urged the United States to do so as
well.
By contrast, the United States is viewed in Southeast Asia as being
overly bilateral, and at times unilateral, and therefore less
supportive of ASEAN's development as a regional institution. In the
near-term, the United States would be constrained in its efforts to
work more closely with ASEAN as a group, because of political relations
with Burma. Current U.S. policy toward Southeast Asia tends to
bifurcate the region into countries with significant Muslim populations
(and higher terrorism threats as a result), and those without them,
paying greater attention to the former group. This split corresponds to
the division between ``old'' and ``new'' members in ASEAN. As well, the
U.S. Enterprise for ASEAN Initiative favors the older members over the
new, and it can be argued that it exacerbates the economic gap between
these two groups as a result.
The fruits of China's diplomatic efforts in Southeast Asia are
increasingly evident. Chinese tourism in the region is ballooning. Each
year, for example, 800,000 Chinese visit Singapore. Equally important,
educational patterns are changing rapidly to favor China over the
United States in some countries. Based on the number of student visas
granted, Chinese educational exchange with Indonesia appeared to have
increased by 51 percent in 2004 over the previous year. The number of
Indonesian students receiving visas for China (2,563) was more than
twice the number granted visas to study in the United States that year
(1,333). This follows a larger pattern of plummeting levels of foreign
students, Southeast Asian students in particular, studying in the U.S.
In the 1980's, Malaysia sent more students to the U.S. than any other
country, at present, Malaysian students do not make it into the top ten
groups. According to the Institute for International Education, the
number of international students enrolled in higher education in the
United States was down by 2.4 percent for 2003-2004, the first absolute
decline in foreign enrollments since 1971-72. However, the top two
groups of Southeast Asian students studying in the U.S.--from Thailand
and Indonesia--have declined by more than 20 percent each, Many go to
Australia, which is establishing itself as a regional educational hub,
but the trends toward China are also dramatic.
RECOMMENDATIONS FOR U.S. POLICY
If the United States frames its policy in Southeast Asia as a zero-
sum competition with China, that will surely become a self-fulfilling
prophecy. However, the U.S. needs to pay attention to widening gaps in
economic and political influence in the region that could, over the
long-term, create serious imbalances. For the most part, safeguarding
American interests in Southeast Asia does not require a reversal of
current policies; instead, it is a matter of expanding or accelerating
existing measures in diplomacy, security, trade and educational and
cultural exchange.
Economics and Trade
1. Although a comprehensive U.S.-ASEAN Free Trade Agreement
is unlikely in the near term, the United States should support
economic integration in Southeast Asia by accelerating U.S.
trade policies in the region.
Participating more fully in Southeast Asia's economic integration
will help prevent the marginalization of the American role at a future
time. In this regard, the U.S. could pursue two paths. One would be to
push for the conclusion of the Doha Development Round by 2005 or 2006,
which would aid integration while it helps to reduce the potential for
trade diversion due to bilateral agreements. The second would be to
accelerate movement on the Enterprise for ASEAN Initiative, and attempt
to ensure that the agreements it produces are compatible with one
another, as well as with the FTA concluded with Australia and a
potential FTA with South Korea.
2. The U.S. should support Southeast Asia in developing the
financial infrastructure to avert or minimize the next economic
crisis.
Southeast Asian leaders fear that sharp economic change in either
the United States or China could spark an economic crisis in the
region, and even that U.S. attempts to persuade China to revalue the
renimnbi could create dislocations in Southeast Asian economies. China
pays increasing attention to such worries and has made loans to prop up
Southeast Asian currencies in the poorer countries, often writing off
the loans. U.S. policymakers should consider support to plans for
regional currency swaps to stabilize capital flows, such as the Chiang
Mai Initiative, and consider offering a second line of defense if signs
of an impending crisis appear. Apart from the benefit to the US
economic stake in the region, such cooperation could help dispel
lingering bitterness toward the United States over the 1997 crisis.
Security
3. The United States should continue cautious multi-
lateralization of its security policy in Southeast Asia,
tailored to Southeast Asian interests and needs.
This does not necessarily mean the demise of the hub-and-spokes
configuration of the American security umbrella in Asia. Rather, it
blunts the edge of military competition in the region while maintaining
a central role for the United States. The most concrete example of this
is the incremental expansion of the Cobra Gold exercises. This year
Japanese Self-Defense Forces joined the United States, Thailand and
Singapore as participants, and a wide range of countries were
observers. It is worth noting that China has been one such observer.
4. The U.S. should take a more active approach to the ASEAN
Regional Forum.
China is carving out a leadership role in ARP, albeit as a
``dialogue'' partner, while the United States tends to focus more on
AMC. Because ARF follows ASEAN rules of consensus, it is likely to
remain a ``talk shop'' for the time being. However, those same rules
help to reduce national sensitivities. In due course, ARF may be an
appropriate vehicle to promote cooperation on maritime security.
5. Washington should consider triangular cooperation--with
Southeast Asia, the United States and China--to address
transnational threats in the region.
Beyond the obvious benefits of cooperation in such areas as
epidemics (avian flu, HIV/AIDS) and transnational crime (human and drug
trafficking), triangular efforts can help reduce underlying tensions
about competing military exercises. Cooperation on non-military, non-
traditional threats would be a tangible indication that the United
States views China as a potential security partner in Southeast Asia,
rather than a strategic rival.
Diplomacy and Development
6. The United States should consider new mechanisms to step
up dialogue with ASEAN as a group.
There is little likelihood that the U.S. will sign the Treaty of
Amity and Cooperation with ASEAN, not least because doing so implies an
endorsement of the ``Zone of Peace, Freedom and Neutrality'' (ZOPFAN),
which Washington has long opposed. However, the U.S can consider two
mechanisms to strengthen ties with ASEAN as a regional institution;
The first is a regular U.S.-ASEAN Summit, perhaps on the margins of
the annual APEC meeting. Obviously, the problem of Burma's
participation would have to be resolved in such a meeting. A second
measure is the establishment of a U.S. Ambassador at large to ASEAN,
similar to American envoys to the European Union, the Organization of
American States, and APEC. However, the appointment of an ambassador
would need to be matched with the resources to expand and strengthen
the regional office of the State Department's Bureau of East Asian
Pacific Affairs.
7. The United States should help develop human capital in
Southeast Asia by expanding programs to strengthen educational
ties.
Education is often a ``soft'' area in foreign affairs. In the case
of Southeast Asia, however, it is very much a ``hard'' area of policy,
albeit a long-term and potentially expensive one. Strengthening
education will boost the region's economic competitiveness, address
some socioeconomic ``root causes'' of extremism and terrorism; and
improve ties between the United States and Southeast Asia at the
societal level. In several Southeast Asian countries, particularly the
poorer ones, more than half the population was born after 1975, when
U.S. presence in the region began to recede.
Educational programs promised for Indonesia and the Philippines
when President Bush visited those countries in 2003 have been slow to
come to fruition. These should be expedited. More broadly, beyond
increasing funds for in-country education and U.S. scholarships,
policymakers need to address the visa problems which discourage
Southeast Asian students from study in the United States.
8. U S. policymakers should avoid exacerbating the gap
between ``old'' and ``new'' ASEAN members and offer initiatives
to increase American influence in the ``new'' a states.
Taking steps to strengthen economic integration in Southeast Asia
would go far in helping to close this gap. However, additional
political and cultural measures can help shore up U.S. bilateral ties
with these poorer countries. Some possibilities include:
Approving the Tariff Relief Assistance for Developing
Economies Act (5191/HR 886), which would boost trade with
Cambodia and Laos, and help compensate for lost income in the
garment sectors of these countries due to abolition of textile
quotas for WTO members.
Addressing the lingering effects of Agent Orange in Vietnam,
which have created an ongoing political problem in the
relationship. This could also have a positive effect on
military-to-military relations, since many high-level
Vietnamese defense officials are war veterans.
Establishing bi-national public-private educational
partnerships for Laos and Cambodia, to provide scholarships for
study in the United States.
Establishing Peace Corps programs in Vietnam and Cambodia
and, when appropriate, in Laos. The U.S. has reached agreement
in principle to place volunteers in Vietnam and Cambodia,
although their precise use is still under discussion.
Negotiations for a Peace Corps program in Laos foundered at the
eleventh hour in the late 1980's, but the U.S. might explore
the possibility of resuming talks, particularly if programs are
initiated in Vietnam and Cambodia.
Supporting the work of field-based American non-governmental
organizations in these countries. For example, The Asia
Foundation works in Laos with a broad range of institutions,
from the National Assembly to women's groups to business
councils.
8. Washington should avoid an over-reliance on ``surrogates''
in Southeast Asia in favor of a more direct and activist policy
in the region.
As the world's only global superpower, Washington's attention is
often diverted from Southeast Asia to crises in other regions. Some
policymakers and analysts assume that U.S. interests are protected by
like-minded Asia-Pacific powers: Japan, Australia and India. Although
there is commonality with these countries (and partnership in some
areas with Japan and Australia), there is also competition for markets
and influence. Moreover, Tokyo, Canberra and New Delhi have their own
limitations in Southeast Asia that Washington should not borrow. In
particular, despite the implications of Secretary Rumsfeld's remarks in
Singapore last week, the U.S. should not assume that India will balance
China in the region in the foreseeable future.
Beyond the substance of a more activist approach to Southeast Asia,
some of which is outlined above, the United States should seek a higher
profile in the region. The U.S. is unlikely to match the level of
Chinese attention with Wen Jiabao as the designated point for ASEAN.
However, President Bush should follow through on plans to attend the
APEC Summit in Hanoi in 2006, and Secretary Rice should participate in
annual ASEAN Ministerial Meetings. In addition, Southeast Asian leaders
have suggested that cabinet-level officials in functional areas--
health, labor, education--visit the region. Lastly, Southeast Asians
also believe that increasing the number of Congressional delegations to
the region would strengthen U.S. policy toward Southeast Asia.
Senator Murkowski. We will have to make that happen. Thank
you. I appreciate your comments.
A great deal of information from all three of you. My
questions are going to be scattered as I am jumping back and
forth here. And, Professor, since you just finished up, and it
is fresh here, I will just start with you.
You have pointed out the situation with Vietnam, you know,
a couple of times in your comments, recognizing that China's
relationship with certain nations in Southeast Asia have not
always been the most congenial, particularly with Vietnam. They
have fought numerous wars over the years. And, I guess, as we
look at the level of influence that China is exerting in the
region, and, now, the economic ties that some of these
countries have, particularly I will speak to Vietnam, the
relationship that they have with China, what role do they look
to the United States to play as China is emerging and as their
economic ties are being strengthened? And let us speak
specifically to Vietnam.
Professor Dalpino. Okay. Let me make a couple of comments
about the Chinese/Vietnamese relationship, because it really is
fairly complicated. They are historic enemies. They are
historic allies. And there is a fair amount of party-to-party
contact as Vietnam looks at the way that China is developing as
a one-party system, but with a market system. And this is
gradually liberalizing.
That said, I think there are two things the United States
can do. One is, the Vietnamese are very much looking to us to
help them enter the international market. And, of course, WTO
is a big issue with them. They do still hope to enter by the
end of this year. A lot of economists think that's unrealistic,
although yesterday the ranking official in the WTO who has the
Vietnam portfolio says he thinks it might be possible.
As you know, Prime Minister Phan Van Khai, is coming at the
end of this month and will meet with President Bush, and I
think that is probably at the top of his list, is U.S. approval
for WTO, and then PNTR, of course, that would have to go along
with it.
We do have a nascent security military-to-military
relationship that has been building primarily through ship
visits and through exchange of high-level defense ministers.
That has built-in brakes. But I think that, to the extent that
it does not raise any red flags with other powers in the
region, particularly China, Vietnam would probably like to
proceed at a cautious rate. But there's potential there, too.
But we are talking about a matter of years, rather than months.
But, here again, this loops even back to the Agent Orange
issue, because the community in Vietnam that cares the most
about that are the veterans who have high-level defense
positions now.
Senator Murkowski. The WTO's next ministerial meeting is
going to be held in Hong Kong this December. What actions can
the U.S. take at that conference to demonstrate its goodwill
toward Southeast Asia? Now, you've mentioned a few particular
items. You know, you pay attention a little bit more to the
financial crisis, regional integration. Anything more specific
that the U.S. might say or do at that time? And what actions,
then, do you expect to see from China, as the hosts of this
conference?
Professor Dalpino. I am really not an economist; and so, I
am not really up on the December meeting. I would just make a
couple of comments.
One, on the currency side, whether or not we support the
Chang Mai Initiative and a regional currency stabilization fund
or mechanism, I think, will be very important. As you know,
China, itself, has flipped on that. When that was first
proposed, at the beginning of the Asian economic crisis, China
joined with us in opposing that. They've now gone around to
that side. And I think we are going to be out-ringed on that in
many ways.
Second, I think that, looking to our own enterprise for
ASEAN initiative, which intends, at some point in the very far
future, to also be a regional FTA--because all of the
countries, at some point, would have an FTA--I think that we
need to look for ways to accelerate that, that are consonant
with WTO, that do not conflict with it, and that would show a
little light at the end of the tunnel for some of the countries
that wouldn't expect to profit from that. We have an FTA with
Singapore. We are negotiating one with Thailand. Malaysia is
probably next in the queue, and Malaysia has been surprisingly
open to this idea. After that, there really is not a very good
candidate. Indonesia has a lot of problems. And Philippines is
not open to the idea of an FTA with the United States.
Another issue is the Millennium Challenge Account. The
Philippines has been invited to apply, as a threshold country.
Vietnam shares the same number of--numerically, shares the same
ability to apply, but does not have the same scores on the
political side, on the democracy and human right side. But
seeing more Southeast Asian countries become eligible for that,
too, I think, would be appropriate, too.
Senator Murkowski. Thank you, I appreciate your insight on
that.
Let's go back to you, Dr. Pei. It was interesting, in
reading your testimony and listening to your comments this
afternoon, as we talk about China's emerging influence we tend
to think of the actions that are happening outside of China's
borders. But what is happening inside is certainly equally
important when it comes to terms of legal and political reform.
As just a matter of coincidence, we have members of the
National People's Congress, they are here in Washington this
week for the annual U.S./China Interparliamentary Group
meetings. It was interesting to read, and then to hear you
again repeat, that the legislation that has been enacted into
law by the NPC were all introduced by the executive branch,
that that legislation that had been introduced by individual
members hasn't, or just does not, become law.
What, if anything, can we, here in Congress, do to help
those members--you know, our fellow legislators, basically--
gain a reasonable level of influence within their own
government?
Dr. Pei. I think this kind of exchange with the Chinese
National People's Congress is very important and should be
maintained. But I would urge that, because China is such a huge
country, and, from my own studies, local legislatures in China
are actually playing, perhaps, a more important and positive
role than the National People's Congress. So, I would recommend
that, in the future, attention--some attention be paid to
developing programs that would reach out to China's provincial
legislatures, because these provincial legislatures manage--
have jurisdiction over millions--hundreds of millions of
people, and if they can play a more positive role, then
probably can create some differences on the ground.
Senator Murkowski. Do you think that this can help in the
areas--you spoke of the judicial corruption and essentially a
judiciary system that is rendered meaningless because of the
corruption, because of just the ineffectiveness of a judiciary.
Do you think that the local level is where you can begin to
effect some change within that judicial system?
Dr. Pei. Oh, yes. Because, according to Chinese law, the
presidents of local courts have to be approved, have to be
confirmed. They may be nominated by the local governments, but
they have to be confirmed by the local legislature. That's a
very important node--pressure point for local legislature to
exert their influence.
In addition, every year local courts have to make--present
working reports to local legislators, and local legislators can
refuse to endorse such reports. And while that does not happen
very often, but, once, it did happen, and when that happened,
that was national news, because that showed that the people's
voice can actually be heard on such an important issue.
Senator Murkowski. With the failure of a strong judicial
system, and recognizing the inherent problems and issues of
corruption within the system, and recognizing the impact that
that has to those that are looking to invest in China--if I am
an investor, I want some security that, if I come in and put
money in--my company in your country, that there's going to be
some level of recourse--how big of an impediment to investment
is--are the failures within the judicial system right now?
Dr. Pei. I think the biggest victims of this ineffective
judicial system are Chinese entrepreneurs. For political
reasons--for very understandable political reasons, the Chinese
Government and the Chinese Communist Party have placed a
premium on attracting foreign capital. So, foreign investors,
compared to Chinese private entrepreneurs, are actually much
better protected under Chinese law. That's because lawsuits
involving foreign investors are adjudicated at a higher level
of the judicial system. For example, they are adjudicated in
intermediate courts, which are less corrupt, than at the basic-
level courts, which are far more corrupt--or far more
susceptible to corruption and political manipulation.
Also, within China local governments compete for foreign
capital. That's why local governments tend to be more friendly
to foreign capital than to local capital. So, if I were a
foreign investor, of course, you go into China, and you know it
is a far more risky place than, say, of developed market, but
you should also, perhaps, as a level for your own comfort, know
that your own investment is at least a little bit more
protected than Chinese domestic capital.
Senator Murkowski. Interesting.
Now, we heard, from both Senator Voinovich and Senator
Obama, the concern about intellectual property rights. And,
going back to your comment earlier, that reform is more
effective, probably, at the local level, what steps are the
central and the local governments taking to improve protection
of intellectual property rights?
Dr. Pei. I think, in this case, the central government
probably is doing more than local governments. That's because
Chinese local governments are closely intertwined with local
economic interests. In many instances, a property--intellectual
property rights violations, you are likely to find that local
governments are heavily involved in the operations, or in the
income streams from those operations. So, I think--and, also,
we must understand that, given the diversity and size of China,
the central government is not always effective in enforcing its
laws. So, you may go to China and get promises from the central
government, but you also must understand that the central
government is not always in a position to keep its promises.
And I was interested to hear Senator Voinovich's story
about his meeting with Premier Wen Jiabao. He mentioned three
cases. I can tell you this story about Premier Wen Jiabao, as
well. There was this peasant lady in China who bought fake
melon seeds from a local vendor. And, of course, no melon grew,
as a result. And she pleaded the case to Premier Wen Jiabao,
and Premier Wen Jiabao gave specific instructions to have her
case looked into by local authorities on three separate
occasions. And nothing happened. And that is--so, that is a
very revealing story about how central authority in China can
be, often, ineffective at the local level.
Senator Murkowski. So, who, in your opinion, or what
entity, would be in the best situation--or the most effective
in improving intellectual property rights protection? Is it
through the WTO? Is it the ASEAN? Is it bilateral
relationships? How do we work this best?
Dr. Pei. Ironically, if we know that--who really controls
the power in China, we will come to this surprising conclusion.
The Chinese Communist Party is actually the entity, in my
judgment, that is most capable of dealing with this issue. Of
course, we have to persuade the Communist Chinese Party that
protecting intellectual property rights is in the critical
interests of the party, itself. But, unfortunately for the
United States, there is no dialogue, in my--according to my
memory, that exists between the U.S. Government and the Chinese
Communist Party.
Senator Murkowski. How do you get that?
Dr. Pei. Because the Chinese Communist Party, as an
organization, is the most effective ruling organization in
China that can actually enforce its decision, not a particular
department at a central--in the central government--for
example, the Commerce Department, which really has very little
power at the local level.
Senator Murkowski. Right. I guess until they decide that
it is in their best interest, they are not going to follow
through, to pursue that.
Dr. Pei. Indeed. The central--the Communist Party, at a
very high level, has to make a critical political decision that
this really involves its key interest.
Senator Murkowski. Thank you.
Let's finish up with you, Mr. Herberg. Obviously, coming
from an energy producing state, energy is always near and dear
to my heart. And it is--it was interesting to hear you, kind
of, describe this--just a tangled web of interests as the
demand in the area grows at what we could--would just consider
an incredible rate. We can't believe the numbers that we are
talking about. And yet these are real. And in recognizing the
pressures that we will see as China seeks to really control the
aspects of energy--it is not just getting your oil from the
OPEC nations, it is really looking to--looking for direct
ownership over oil production, and all aspects of how we get
there. I do not know whether we can clearly say China is
unwilling to share their oil. You smile, like maybe, in fact,
we can make that statement and be conclusive about it. But, you
know, we talk about bringing China into the IEA for global oil-
sharing programs. This is not something that they have--at
least from their actions--they indicate a willingness to do
that. How do you reconcile that?
Mr. Herberg. Let me just say, I spent 20 years with ARCO,
and, obviously, we were a major player in Alaska, so I know
that oil----
Senator Murkowski. Did you ever get up north?
Mr. Herberg. I was in Anchorage, in the North Slope, quite
regularly, but mostly other places in the world. But I did get
familiar with Alaska.
But I think that is the tough issue with China, it views
energy through this mercantilist-status lens. And the only way
I can capture it is to say energy--in particular, oil, but
energy is too important to be left to the markets. And so, the
leadership focuses on this as a state strategic problem--it is
high politics of energy security and national security, rather
than just low politics of energy supplies--so that everything
they do is through this prism of, How do we, by state effort,
secure those supplies? Because it is this deep-seated fear that
energy shortages are going to undermine economic growth, job
creation, and, ultimately, social instability and the power of
the party.
Senator Murkowski. Well, but, you know, when you think
about it----
Mr. Herberg. This is very real.
Senator Murkowski (continuing). ----it is very real.
Mr. Herberg. So, there is a visceral connection between
energy supply--secure energy supplies, at whatever price, and
the political power of the leadership and social stability. So,
that is why this issue is so visceral for them, so important.
You can hope that, in the future, China goes down the--or
up the learning curve that they did with the WTO and trade.
Twenty years ago, trade was entirely state controlled in China.
It took a 20-year learning curve for them to come around to the
notion that trade, the WTO, and markets actually can work for
China. I think, in the long run, China's going to make that
journey up that learning curve on energy, as well; but, for
now, they view it in this very zero-sum unilateralist, state-
controlled prism that leads them to sponsor the state
companies, the state-to-state deals on a whole series of these
things, to see it in military and maritime terms, in terms of
controlling sea lanes, to attach it very closely to their
overall geopolitical architecture, both regionally in Asia, but
also globally, and attach very much of it to their perception
of the U.S. control of global energy and oil markets. And so,
it is a very powerful mindset that is taken--that is there on
the energy side. It is a very antique, mercantilist viewpoint.
And until they begin to see that markets can actually work for
them on the energy side, oil side, I think we are just going to
see more of this.
And it is--I think part of the thing that the U.S.
Government needs to do is engage China at very high levels. You
know, DOE is working with China bilaterally and in working
groups and a whole series of things, but I think the--at a
higher level, we need to begin to talk to them about using
markets, about regional cooperative mechanisms, joint
development areas. There is a whole series of things that you
can do to create confidence. IEA oil sharing, which you
mentioned. You know, you have this huge imbalance between the
old IEA system, which was built in the 1970s, based upon the
oil-demand picture then, and today's oil market, which is
driven by China, India, Southeast Asia oil demand. But they are
not in the IEA. They are not in the oil-sharing mechanism. You
have to find a way to get them into some global oil-sharing
mechanism.
Senator Murkowski. What happens if you do not?
Mr. Herberg. It will just be more of this zero-sum
competition for supplies. That is the outlook. Because the
overall regional mistrust, broader--I mean, Japan/China, China/
India, China/Russia--the overall rivalries, in the broader
sense there, simply mirror themselves in the lack of trust over
energy deals.
And let me give you a perfect example of that. China spent
three or four years negotiating with Russia for an East
Siberian oil pipeline to come down to Northeast China. At the
last minute, Japan jumped in and offered $10-12 billion worth
of financing field development to build that pipeline, not to
China, but to the Pacific coast, where it would go into Asia
and, much of it, to Japan. China viewed that as a strategic
denial strategy. It was simply a battle over strategic control
in Northeast Asia. And I have heard that, frankly, from the
Japanese side, as well.
And so, you see the same geopolitical triangle problems,
particularly the Japan/China relationship, mirrored in their
attempts to solve energy problems, or the way in which they go
about seeking those energy supplies.
So, you have to, kind of, attack this thing, I think, at
both levels, both to try to create mechanisms that de-link
energy from the broader geopolitical context, so that you can
talk about cooperative, mutual trust, oil sharing, pipelines,
regional cooperation, but unless you deal with the broader
geopolitical rivalries and distrust, as well, which there is no
system right now in Asia for that--and, frankly, I am not sure
the U.S. is deeply enough engaged in that--until you begin to
work on those, as well, you may not make much progress on the
energy side. But I think, at least in energy, you have to begin
to try to steer China towards more collaborative, market-
oriented strategies--as well as the others in Asia, because
this is a--one provokes the other. I think you have to keep in
mind that the others are doing similar kinds of things, and the
Chinese are reacting to that, overlaying this deep sense of
insecurity about their future supplies. And that is a scale
problem. I mean, just a simple scale problem. Chinese oil
demand will grow in the next 15 or 20 years by the equivalent
of Saudi Arabia's total oil production today. China, alone.
Senator Murkowski. In how long a time period?
Mr. Herberg. In the next 20 years. And that is a very short
period of time in a capital cycle in the oil business, as you
know. So, it will grow by the equivalent of a Saudi Arabia,
from, say, 2002 to 2025. These are big numbers, and it really
focuses the mind of the leadership. Where is this oil going to
come from? Where is the natural gas going to come from? Which--
how much of it will be imported from----
Senator Murkowski. Do you see the same picture, then, with
natural gas as you do with oil, in terms of how China is
viewing the need for the resource?
Mr. Herberg. Natural gas is not as acute a problem, because
they are not--right now, they do not import natural gas at all,
and that is probably because they use so very little, 3 percent
of their mix. They will be importing, over time, really--
really, after 2010, imports will accelerate. But, even 20 years
out, it would be unlikely that they would be importing more
than 30 or 40 percent of their gas. But that is still a
significant number. And so, at some level, in the long run,
that also feeds this sense of, ``Where are we going to get
these supplies?'' And it is not a coincidence that virtually
all that imported gas will come from many of the same places--
the Persian Gulf, Russia. Fortunately, a lot of that from
Southeast Asia, which has much better gas, LNG, capabilities--
Australia, Indonesia, and Malaysia, for example. So, gas
reinforces some of the same problems, but it is not nearly as
acute a problem for China.
Senator Murkowski. Well, recognizing that they will be
looking to the Middle East for so much of their imported oil,
with just ever-growing dependence on OPEC nations for their
energy needs, how does this impact our--well, I guess, their
foreign policy and the policy challenges that we face as a
nation in meeting our energy needs, as it relates to oil?
Mr. Herberg. I think it is--the Persian Gulf is where this
is really going to be an important issue. China will become a
major player in the Persian Gulf, politically, geopolitically.
That is inevitable.
Senator Murkowski. How much did they get--how much are
they relying on Middle Eastern oil right now?
Mr. Herberg. They import three-plus-million barrels a day.
About half of that comes from the Persian Gulf.
Senator Murkowski. About half.
Mr. Herberg. A little over half. So, that is, you know, one
and a half out of a total consumption of about six and a half.
So, it is significant now. The long-term issue is that the bulk
of reserves are in the Persian Gulf. Incremental supplies,
globally, if you take world demand from 80 to 120, which is an
IEA or a DOE forecast, probably half to two-thirds of that is
going to have to come from the Persian Gulf. So, just by the
scale of the resources, an estimate would be, for China, 20
years from now, it would be importing 75 percent of its oil, of
which two-thirds would be from the Persian Gulf. So, it will
importing oil on the scale of five- or six-million barrels a
day from the Persian Gulf 20 years from now. And you can
already begin to see China beginning to focus its diplomacy on
the Gulf, both in Saudi Arabia--on both sides of the Gulf and
throughout the region. But it will become a major player in the
region. I think, for the U.S., we need to begin to think
about--we are used to being the dominant player in the Persian
Gulf. How do we accommodate China's growing influence?
Another piece of this, not to give you too many numbers,
but roughly two-thirds of Persian Gulf oil exports now go to
Asia. They do not go to Europe or the U.S., really, and--
relatively small. Most of the Persian Gulf oil exports go to
Asia, and a bigger and bigger share of that will be China in
the future. That is not lost on the Persian Gulf producers.
They are turning East, diplomatically, as well. So, you see a
very real, kind of, nexus of interests there between the Gulf
and Asia, and particularly China, because it is going to be
such a big piece of this, and also as a geopolitical player,
unlike much of the rest of Asia. We will have a competitor for
influence in the Gulf. I do not know whether that is good or
bad, because our interests converge in the stability of the
Gulf, because we both will depend on flows being stable, oil
flows from the Gulf. But we also view Middle East and Persian
Gulf politics in a very different way. So, I would think it is
going to get a little stickier.
Senator Murkowski. That is one way to put it.
I appreciate the time that you all have given to us this
afternoon, and I greatly appreciate your comments. Thank you.
And, with that, we will stand adjourned.
[Whereupon, at 4:40 p.m., the hearing was adjourned.]