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JUNE 17, 1998

Mr. Chairman, thank you for the invitation to address the Ways and Means Committee Trade Subcommittee on the important issue of China's MFN status. This is, of course, a timely hearing, with President Clinton's historic trip to China just a week away. I thus welcome this opportunity to make the Administration's case for MFN renewal and look forward to engaging Committee members in a productive dialogue on this matter. My testimony today will be divided into three parts. First, I will review the reasons why a stronger, more constructive relationship with China is in the U.S. interest. Second, I will outline the Clinton Administration's strategy of engagement, highlighting what we have accomplished while noting the obstacles we still face. Finally I will examine the issue of MFN within the broader context of our overall China policy, examining the serious impact revocation would have on our ability to engage the Chinese. China Affects U.S. Interests Mr. Chairman, peace and stability in East Asia and the Pacific is a fundamental prerequisite for U.S. security and prosperity. Nearly one half the world's people live in countries bordering the Asia Pacific region and over half of all economic activity in the world is conducted there. Four of the world's major powers rub shoulders in Northeast Asia while some of the most strategically important waterways on the globe flow through Southeast Asia. The U.S. itself is as much a Pacific nation as an Atlantic one, with the states of Alaska, California, Oregon and Washington bordering on the Pacific Ocean and Hawaii surrounded by it. American citizens in Guam, American Samoa, and the Commonwealth of the Northern Marianas live closer to Asian capitals than to our own, vast numbers of Americans work in the Asia-Pacific region, and an increasingly large number of Americans trace their ancestry back to the Pacific Rim. For these and many other reasons, the U.S. has remained committed to the Asia-Pacific region and has spent its resources and blood defending and strengthening our stake in the region. Since coming to office, President Clinton has repeatedly made clear that America will remain an Asia-Pacific power. We maintain a sizable military presence in Asia; enjoy a vibrant network of mutual security alliances with Australia, Japan, the Philippines, the Republic of Korea and Thailand; and have significant economic ties with most countries in the region. China's sheer size means we must deal with China in our capacity as an Asia-Pacific power. China is home to one quarter of humankind and occupies vast territory that borders on 14 nations. But China's remarkable economic achievements, increasing diplomatic prominence and growing military strength make it a nation that affects not only our interests in Asia but our vital national interests across the board. In terms of security, China is already a global player. China holds a permanent seat on the UN Security Council. It possesses nuclear weapons, the world's largest standing army, and a rapidly advancing industrial and technological capacity. It borders some of the globe's most troubled regions: the Indian Subcontinent to the West, the Korean Peninsula to the East, and the opium-producing region known as the Golden Triangle to the South. Its economic importance is no less profound. The Chinese economy is already one of the largest in the world, and many observers predict that if current growth rates can be sustained, it will be the largest within several decades. With 1.3 billion people rapidly modernizing, moreover, China is having and will continue to have a global impact on the environment. Early in the next century China will be the world's largest producer of greenhouse gases. China will thus be key to finding a solution to the pressing problem of climate change. Engagement Works China, therefore cannot be ignored. In recognition of this reality, the Clinton Administration is working to encourage the emergence of a China that is stable and non-aggressive; that tolerates differing views and adheres to international rules of conduct; and that cooperates with us to build a secure regional and international order. Our strategy has been to engage China by working to identify areas on which we agree while continuing to forthrightly confront issues on which we do not. We have made significant progress in many aspects of our relationship with China since this committee last heard testimony about MFN renewal in June 1997, and I would like to take this opportunity to note some of those achievements. First, the Chinese have played a constructive role in working to defuse tensions on the Korean Peninsula. China encouraged North Korea to come to the negotiating table and now joins us in Geneva at the four party talks. China hosted recent North-South negotiations and is actively addressing the humanitarian crisis in North Korea as its largest donor of food and fuel. Second, China is playing a similarly important role in seeking to roll back escalating tensions on the Indian subcontinent. China chaired a recent meeting of the permanent members of the U.N. Security Council. It has condemned both parties for conducting nuclear tests and has joined us in urging them to refrain from further testing; sign the CTBT; avoid deploying or testing missiles; tone down their rhetoric; and work to resolve their differences -- including over Kashmir -- through dialogue. These efforts have been complementary to our own. By contrast, if China were on the sidelines or actively opposing us, this message would be both less effective and the prospects of a solution more distant. On the non-proliferation front, we have built upon the successful efforts of this and previous administrations to help bring about Chinese adherence to international norms. Within the past year the Chinese have: committed to phase out nuclear cooperation with Iran; reaffirmed their commitment to refrain from assisting unsafeguarded nuclear facilities anywhere; implemented strict, nation-wide nuclear export controls; passed in principle and are prepared to publish regulations controlling the export of dual-use items with potential nuclear use; joined the Zangger NPT exporters' committee; signed and ratified the chemical weapons convention; and adopted chemical export controls -- which they have just expanded. There is, of course, still much work to be done. We continue to be concerned about reports of missile equipment and technology transfers to Iran and Pakistan and reports that Chinese commercial entities have done business with Iran's chemical weapons program. Still, we have come a long way and there is good reason to believe that continued engagement will lead to a further positive evolution of China's attitudes and actions vis a vis non-proliferation norms. Even in the contentious area of human rights, engagement with China is yielding tangible results. Just six months ago members of this Congress as well as the international community at large had grave concerns regarding the health and status of two of China's most prominent political dissidents, Wei Jingsheng and Wang Dan. Against a backdrop of intensive dialogue with the United States and continued, public U.S. criticism of China's human rights record, the Chinese authorities have released both Mr. Wei and Mr. Wang on medical parole and have permitted some other dissidents to depart China. China has also signed and submitted for ratification the UN Covenant on Economic, Social, and Cultural Rights and has pledged to sign the UN Covenant on Civil and Political Rights. President Jiang Zemin also recently hosted a delegation of U.S. religious leaders, and the Chinese government has agreed to follow up this visit with further dialogue and exchanges. These exchanges can and do produce results, as the recent release from prison of Bishop Zeng Jingmu demonstrated. This is not to suggest that human rights abuses in China are a thing of the past. On the contrary, we have reported to Congress that serious and widespread human rights abuses continue in violation of internationally accepted standards and norms. But the steps the Chinese have taken within the space of just a few months are nonetheless noteworthy, even if systemic change to protect fundamental rights remains inadequate. These are not meant to be exhaustive examples of the fruits of engagement; nor are they meant to mask the persistence of serious differences between our two countries. They are intended simply to show that engagement is working and that we have made progress in encouraging China's development as a full and responsible member of the international community. MFN: A Critical Component of Engagement MFN provides a vital underpinning for this strategy of engagement. Access to the American market is the most tangible evidence there is of the benefits of being part of the international community. China's economic ties with the world give it a huge incentive to participate in and abide by the rules of the international system. If the United States, the world's largest and most open economy, were to deny China a normal trading relationship, China's stake in the international system would shrink significantly. Withdrawal of MFN would devastate our economic relationship. Denial of MFN to China could invite Chinese retaliation against our $13 billion in exports; endanger the roughly 170,000 jobs in the United States those exports support; hurt American consumers through price increases on basic goods; disadvantage American business people hoping to compete in China's burgeoning market; and derail ongoing multilateral and bilateral trade negotiations intended to increase access to the China market and ensure China's compliance with international trade rules. The Administration is concerned about our growing bilateral trade imbalance with the PRC. But the most prudent way to address this problem is to get China into the WTO on a sound, commercially viable basis. We need to remove barriers disadvantaging our exports to China, not create barriers to imports from China, which would actually harm our own consumers as well as manufacturers who depend on Chinese inputs for their products. We are pursuing this goal with all the tools available, including WTO accession negotiations and bilateral trade negotiations. Progress in these talks would certainly be jeopardized should MFN be revoked. For the PRC, loss of MFN status would of course hurt its export sector. But more important for the United States, it would threaten China's ambitious plans for structural economic reform. China has unveiled a bold plan to reform China's mammoth state sector and troubled financial system. This plan is intended to rapidly accelerate China's transition from a command to a market economy and thus is very much in line with our own economic interests. China's plan can only succeed, however, if growth can be sustained. And yet growth in China slowed from 8.8% this time last year to 7.2% in the first quarter of 1998, fueling speculation that China will be unable to carry through with its reforms. Should the export sector -- already under pressure due to significant regional currency depreciations -- suffer an external shock along the lines of MFN revocation, reforms that are profoundly in our interest would be endangered. This would increase uncertainty in the Asia-Pacific just when stability is most desperately needed for regional recovery, with MFN revocation likely prompting China to abandon its universally lauded pledge to not devalue. Devaluation of the yuan would in turn set off another round of competitive devaluations in the region, raising the specter of destabilized financial markets in Asia and beyond. MFN revocation would also harm our friends in Taiwan and Hong Kong. Taiwan has over $36 billion invested in the PRC, much of which is in export industries. Hong Kong firms, for their part, own, finance, supply or service thousands of export factories throughout China's booming southern region. Hong Kong, moreover, handles almost 50% of U.S.-China trade, making it highly dependent on continued normal trade relations between the U.S. and China. Hong Kong authorities estimate that MFN revocation would slash trade by up to $34 billion, jobs by about 85,000 and income by about $4.5 billion. Hong Kong leaders across the political spectrum, including opposition leader Martin Lee, have thus spoken out strongly in favor of MFN renewal. In short, severing normal trade ties with China would have severe economic consequences, and would hurt U.S. interests as much if not more than those of the PRC. Revocation of MFN, moreover, would not only damage our growing commercial relationship; it would affect our relationship with China across the board. MFN, despite its name, is not a privilege we extend to only our closest allies. It is, rather, the standard tariff treatment granted virtually every nation in the world, including many with whom we have substantial disagreements. To the leadership in Beijing, therefore, the cessation of normal trade ties would be tantamount to a reversal of engagement, thereby imperiling gains painstakingly achieved and eliminating prospects for future progress. More specifically, Mr. Chairman, revocation of MFN could: -- Undercut our strategic cooperation, particularly in defusing escalating tensions in South Asia, dismantling North Korea's nuclear program, and pursuing a permanent peace settlement on the Korean Peninsula. -- Result in a more belligerent and xenophobic foreign policy. -- Handicap our efforts to strengthen China's integration into non-proliferation regimes and limit our ability to curtail technology transfers to unstable regions. -- Risk China's support for U.S. initiatives at the U.N. as well as cooperation on global issues such as drug trafficking, alien smuggling and climate change. While risking vitally needed cooperation on all of the above fronts, what would the United States get in return? Denial of MFN could actually hinder our efforts to improve human rights in China. Revocation of MFN would create a tense, hostile atmosphere in which Chinese leaders would be less inclined to take the kind of actions we have worked painstakingly to encourage: releasing political dissidents, allowing international visits to prisoners, signing and ratifying international human rights covenants, and engaging international religious leaders. Furthermore, the loss of the U.S. market might have the unintended effect of weakening some of the most progressive elements of Chinese society. Private entrepreneurs have been able to expand personal freedoms by being independent of the state, and our trade and investment have helped to expand the habits of free enterprise and independent thinking. We need to encourage this sector, not stunt its growth, and we can only do that by providing access to American markets and ideas. Mr. Chairman, as Secretary Albright has often said, there is no greater opportunity -- or challenge -- in U.S. foreign policy today than to encourage China's integration into the world community. President Clinton's decision to extend MFN status to China reflects our commitment to this goal. The Administration shares fully many of the concerns expressed in Congress and elsewhere about some Chinese policies and practices. But our concerns can best be addressed and our interests best advanced by continuing to engage Chinese leaders on the full range of security, economic and political issues. This will simply not be possible if we revoke MFN. Revocation of MFN could derail the entire US-China relationship, eliminate prospects for cooperation, strengthen the hand of those in China seeking to undermine reform, limit our ability to influence China's development, and imperil innocent bystanders in the region in the process. The historic task of integrating China into the international community requires nothing less than a comprehensive, rational strategy of engagement. This strategy has met with considerable success thus far, and I am confident that with Congress' support, we will continue to make progress in the run up to the summit and beyond. (end text)

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