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Mr. Robert A. Kapp
U.S. China Business Council
1818 N Street, NW

Washington, D.C. 20036

Mr. Chairman, I thank you for including me in this hearing of the Telecommunications, Trade and Consumer Protection Subcommittee today. I believe that this is the first opportunity I have had to meet with you and this Subcommittee, and I welcome the chance to open and develop a lasting dialogue between us on topics of mutual concern.

I am Robert Kapp, president of the US-China Business Council since 1994. The Council is a private, nonprofit and nonpartisan organization headquartered in Washington, with field offices in Beijing, Shanghai and Hong Kong. As the leading organization of American companies engaged in trade and investment with the People's Republic of China, the Council provides to its nearly three hundred corporate members a range of business advisory services, publications, meetings and conferences, and representation on issues of public policy in the US and in China. My own background began with academic work on China, and includes twenty years of teaching and of trade association work in the state of Washington prior to my coming to the US-China Business Council.

I will keep this testimony brief, and hope that a useful discussion with Members will emerge. I have appended a number of graphic and statistical items, as well as my 1997 testimony to another House Subcommittee; that testimony spoke to the issue of maintenance of normal US-China trade relations -- so called "MFN" -- last year, and its points remain applicable today.

Mr. Chairman, the United States and China have, since the establishment of regular diplomatic relations in 1979, built a massive economic and commercial relationship that now reaches deep into the economic fabric of both nations. Particularly since 1989, China's rapid economic growth and trade development have made the PRC not only a significant current and potential market for US and other business, but also a major target of foreign direct investment and a significant player in the Asia-Pacific regional economy.

China represents today a significant market for major American exporters, but for carefully focused small and medium sized businesses as well. While the difficulties of doing business in China are long-standing and well known -- they include market and investment barriers, legal and regulatory opaqueness, bureaucratic complexities, and deep-rooted linguistic and cultural differences -- the fact is that many American companies have operated successfully in China for years, even decades, and that many American companies are operating profitably there today. In the process, American exports to China generate hundreds of thousands of American jobs by any standard, while Chinese imports to the United States provide employment in the American service and sales sectors and economically priced goods to American consumers of all income levels.

Thus, in the space of two decades, China has risen to fourth place among all US trading partners.

The economic and commercial relations of the United States and China have never been free of disagreement, and they have never existed in a vacuum, unconnected to other currents in the overall US-China relationship.

On the question of commercial disagreements, most Members will recall some of the high-tension moments in US-China trade negotiations since the 1980s, when the US threatened trade sanctions under US trade law. Areas of dispute have included a variety of market access issues and the problem of intellectual property violations in China. Fortunately, in the view of most serious observers, each near-conflict has resulted in a last minute agreement, whose results have brought measurable (though incomplete) reduction of the practices that occasioned the conflict in the first place. American business remains vigilant on these and other problems relating to our ability to do business effectively in China and, thanks to the extraordinary receptiveness and responsiveness of the Office of the US Trade Representative under successive leaders, we are confident that an effective "partnership in vigilance" exists between the US private and public sectors.

On the question of the linkages between commercial/economic relations and the larger fabric of US-China relations, I need only mention the periodic shocks that have jolted the entire bilateral relationship. These shocks have regularly occasioned demands for cessation of US-China commercial relations, or for other sanctions on US-China trade and investment.

The greatest of these jolts, of course, was the tragedy of 1989 at Tiananmen. Since then, there have been others, as for example during the prolonged Taiwan-related crisis of 1995 and 1996.

Thanks to the persistence of the Cold War-era Jackson-Vanik Amendment to the 1974 Trade Act, which requires annual renewal of normal tariff status for imports from so-called "non-market economies," the annual MFN battle, which ranges over commercial and non-commercial issues

alike, has been the predictable focal point of bilateral tension when nothing more dramatic was on the burner.

Regrettably but understandably, each jolt to US-China relations has led some in public life and in the world of public opinion to argue that punitive economic measures against China would be the most effective (and the most convenient) American response to perceived Chinese non-commercial misconduct.

We in the business world have in fact come to expect, at about this time of year, a bombshell of some sort that bears the potential to place $75 billion in trade and more than $20 billion in American investments at risk.

For our part, we have argued (as some of the attached documentation suggests at greater length) another view: that the maintenance and expansion of two-way trade and investment with China remains the essential glue that holds a vital US international relationship intact in times of serious trouble; that fatal compromise of that mutually significant economic relationship would be the surest prescription for failure in the effort to address our non-economic differences with China; but that economic and commercial ties alone cannot forever sustain a relationship that does not see substantial progress on non-commercial fronts.

Members of this Committee will have noticed that, since 1996, a pronounced change for the better has occurred in overall US-China relations. The two sides are again fully communicating at the government-to-government level, after several years of very ominous communications breakdown. A number of acute irritants have been removed from the arena. The visit of

President Jiang Zemin last October, and the upcoming visit of President Clinton to China, are welcome evidence of the return to substantive consultations and cooperation between the two governments.

As the United States and China pursue cooperation in areas of mutual interest and seek to define and contain the areas in which they cannot reach agreement, we in the business community hope that economic, commercial, and investment-related subjects will rank high on the bilateral agenda.

At the top of our list of concerns is the hope that the US and China can move decisively toward bilateral agreement on the terms of China's accession to the World Trade Organization.

All Americans involved on the China WTO matter use the familiar term, "on commercial viable grounds," to describe any package of commitments that the United States could accept as the terms of China's accession. We are also fond of maintaining that China's accession must be "purely economic," and not "political."

It is certainly true that American business has steadfastly maintained that China's accession must be based on firm commitments to realize a long list of commitments -- in market access, tariff reduction, liberalization of services, legal transparency, and a host of other areas. The needs and demands of American businesses are perhaps the central driver of the US negotiating agenda with China. Any suggestion that American business prefers to "cut a deal," regardless of specifics, is false.

At the end of the day, accession to the WTO places on China's government far reaching demands for economic and social reorganization within China. It is China, not the United States, who faces the stiffest challenges in contemplating WTO participation. China, like every other nation, has its share of "openers," who want to seize the opportunities presented by full participation in the rules-based world trading system, and its share of "closers," concerned at the potential loss of sovereignty, the prospects of grievous economic damage from foreign competition, and the specter of social dislocation caused by the failure of indigenous businesses to survive foreign competition in the domestic market. In this sense, any WTO accession agreement is highly "political" in China itself.

We believe, however, that particularly in the short period since last October's Summit meeting, Chinese and US negotiators have plunged into the WTO talks with an intensity and specificity not previously seen. We are hopeful that by the time President Clinton reaches Beijing, the two sides will at the least be able to mark decisive progress in some of the many areas where agreement has thus far proven elusive.

As the prospect of China's entrance into the WTO seems to grow brighter, it is important to remember that accession on legitimate commercial terms will bring real benefits to American firms and American workers. But it is also important to remind ourselves that America will not be able to enjoy those benefits if it is not prepared to treat China, upon accession, fully as a WTO member. What that means in practice is that the United States needs to prepare for the day, hopefully not too long in the future, when it moves China out from under the cloud of endless annual MFN reconsideration. Permanent extension of normal WTO-standard tariffs is the first principle of reciprocal treatment among WTO members. It would be tragic and foolish for the

United States to play the holdout for so many years on the requirements for Chinese WTO accession, finally come up with a genuinely satisfactory agreement, and then fail to take advantage of the terms it had managed so painfully to wring from the PRC by failing to end the annual MFN exercise. On this matter, the role of the Congress will be absolutely critical. In our view, it is not too early to be thinking ahead toward this eventuality. In this sense, China's accession to the WTO is not only "economic" but "political" here at home as well.

Mr. Chairman, American business knows from decades of on-the-ground experience that China is a tough place to do business. We know too, however, that it is possible to learn the ropes in China; that it is possible to learn from one's mistakes and do a better job the next time around; that it is possible, though never easy, to navigate the constantly shifting roadmap of a huge and bureaucratic economy with unclear laws, cloudy jurisdictional boundaries, barely translucent decision-making processes, frequent policy changes, and deep-seated social traditions very different from our own. At times, American businesses become exasperated; they are seldom patient. But the fact is that virtually all US firms have stayed the course in China; a great many are succeeding in their own eyes -- whether profitable, or meeting their market-share goals, or otherwise fulfilling their own intentions. No successful American company in China ever sits back, content in the knowledge that it now knows what it needs to know and is already doing everything it needs to do. The most successful US firms in China are at home with the complexities of the Chinese business environment. They know individual Chinese counterparts by name. Their people can handle Chinese language when necessary. They are alert to changes in the landscape, and adept in adjusting to them. They are firm on essentials, but seldom become vituperative, and never do so in public. They are conscious of their responsibility to act ethically,

according to their own codes of conduct and in accordance with host country law. They know when to go home, and knowing that, few have found it necessary to do so.

In this sense, we believe that business has much to offer in the larger US engagement with China. We are encouraged by the growing intensification of US-China contacts, not only at the government to government level but in other areas as well. We think that it is vital for the United States to regard China realistically, not from a single static view etched permanently into our consciousness. We know that, for all its persistent and deeply entrenched habits, China is a gigantic national Work In Progress, undergoing changes of national direction on an almost daily basis. The remarkable measures to further expand the market economy and discard the Soviet-Maoist economic heritage, announced by the Chinese authorities even in recent weeks, is further evidence of this. As businesses, and as a nation, we need to stay on top of those changes and, when possible, contribute constructively to China's evolution in positive directions. We are prepared to work with the Congress and with the Administration to further the process of building a satisfactory, civil 21st-century US-China relationship.

Thank you again for the opportunity to meet with you today. I will be happy to respond, as well as I can, to the Committee's questions.

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