FROM THE OFFICE OF PUBLIC AFFAIRS

I appreciate the opportunity to speak to youtoday and I would like to thank the U.S. China Business Councilfor inviting me and hosting this event. The U.S. China BusinessCouncil is a strong and forceful voice for deeper ties with Chinato integrate it into the global economy. You know better thananyone the critical importance of U.S. engagement with China toour future prosperity -- and for progress on improved socialconditions in China.

It goes without saying that the United States hasa wide range of interests with respect to China. I’ll returnto that later, but I would like to start today with our economicstrategy. I would like to speak with you about what is in thebest interest of the United States when it comes to our economicrelationship with China and how best to pursue those interests.

Our economic relationship with China should beviewed in the context of an overall strategy to strengtheneconomic ties in Asia. As a result of sweeping economic reforms,Asia today is the fastest growing economic region on earth andhome to some of the world’s most dynamic market economies.Developing countries in Asia now represent 24 percent of worldGDP. Their share of world trade rose from 9.6 percent in 1981 to16.1 percent in 1994. This, in turn, has resulted in an explosionof trade with the United States. We now export more to Asia thanto Europe. Helping Asia continue on the development path isclearly in the interest of the United States -- and the keynation in this strategy is China. And if we turn our back on ourrelationship with China it will affect not only thatrelationship, but relationships throughout the region.

The United States has three primary strategicinterests in our economic relationship with China.

Our first strategic objective is to help promoteChina’s integration into the global economy. The history ofthe last half century, a time when nations around the globe havebecome increasingly interdependent, clearly has proven thatintegration reduces conflict and provides a better foundation forstability and prosperity. This requires integrating China intothe major economic institutions where we can work to addressshared approaches to common problems.

This also involves China opening to the free flowof trade and investment. China obviously represents enormouseconomic potential for us, but also poses significant barriers totrade and investment.

This Administration has worked hard to openmarkets in China. Our exports to China have increased at anannual average rate of 16 percent from 1991 to 1996, comparedwith U.S. export growth of 11 percent to the rest of Asia and 7percent to the rest of the world. But China still has averagetariff rates of 23 percent and a range of non-tariff barriers --there is a great deal of work yet to do. Negotiations with Chinaon the commercially meaningful market-opening terms critical toits accession to the World Trade Organization provides a keyopportunity to move forward.

China’s openness is increasingly importantbecause it is directly related to what many feel is an importantargument for revoking normal trade relations with China: thetrade deficit. Obviously, in recent years, our trade deficit withChina has risen at a rapid rate and has emerged as a major issuein the debate over most favored nation status. What has been lessreported, but is important to note however, is that our overalltrade deficit with Asia has remained roughly the same in thatperiod. The composition of the trade deficit has shifted to Chinalargely because companies from other Asian economies are shiftingtheir operations to China.

Trade deficits with a low wage country like Chinaare often seen by Americans as evidence that the United Statescannot compete with low wage nations. It is true that poorcountries -- like China -- are able to produce some low-wage,low-skill items at much lower cost than U.S. firms, to thebenefit of U.S. consumers. But in return they buy American goodssuch as airplanes or construction equipment produced byhigh-wage, high-skill American jobs. As a highly productive andcompetitive economy, the United States can -- and does -- tradewith low wage countries, including China, and the benefits ofincreasing trade with these countries vastly outweigh thedisadvantages.

Our second strategic objective is to support HongKong remaining a growing, vital financial center and economicengine for China and the rest of Asia. As you know, many haveconcerns about the continuation of civil liberties in Hong Kongafter transition of sovereignty to China. This Administration hasmade it clear that erosion of democracy and human rights in HongKong after the transition would be of grave concern to us.

We know, too, that the Chinese recognize howimportant maintaining Hong Kong’s open economy is to theirown economic prospects. There is no firewall between economicfreedom and freedom in its many other forms. The unrestrictedinterchange of information and ideas is critical to economicgrowth and prosperity.

Our final objective is to help China succeed inits effort to move to a more market oriented economy. Asuccessful reform process requires putting in a place the fullarray of institutions that represent the foundation of a moderneconomy. A critical part of this is a sound legal framework whichpromotes the rule of law. As you know better than anyone, forbusiness to prosper, it must know what to expect when investingor attempting to sell goods in another country, and then to getwhat it expects. Helping China establish these conditions iscertainly in our interest by improving the prospects for U.S.businesses, but it also brings tangible rewards for the Chinesepeople too. Building a just legal system, with enforceable rightsand transparent procedures is critical to economic development --but as we know so well in this country, it also is a fundamentalpart of a more open society.

These are our fundamental economic objectiveswith China, but as I said a moment ago, clearly the United Stateshas other strategic interests with China from non-proliferationto working on problems in the Korean peninsula to the environmentto helping to fight infectious diseases. And we have seriousdisagreements with China on human rights, religious freedom, andprison labor. The question is what is the best way to advance ourinterests and address our those problems.

Revoking normal trade relations, which some haveproposed, would fundamentally undermine our ability to advanceour economic and national security interests. Severing trade tieswith China will not isolate China. It will isolate the UnitedStates.

It will undermine our ability to participate inthe economic activity in the region, the most dynamic in theworld, particularly with respect to the ongoing integration ofthe Asian economies. More importantly, it will lead other nationsin Asia to question our commitment to the region. Around theworld, it will undermine our leadership in the global economy andour efforts to pursue greater trade liberalization.

Revoking normal trade relations with China wouldalso harm Hong Kong in the name of supporting it. As a coalitionin Hong Kong of human rights leaders, the current government, andDemocracy Party chairman Martin Lee has made clear, it would beexactly the wrong step if our objective is to preserve anautonomous and free Hong Kong. They argue, rightly, that it wouldseverely harm the Hong Kong economy, which is critical tomaintaining autonomy.

Revoking normal trade relations is a bluntinstrument. We need not choose between denying MFN and having noinfluence. Instead, we can maintain normal trade relations anduse other economic and diplomatic tools when we disagree with theChinese. When we raised the issue of rampant piracy of U.S.goods, after tense negotiations, our Administration reached anagreement with China over intellectual property rights, after thethreat of targeted sanctions. China closed 39 plants that wereproducing the pirated good and reached agreement on a new regimeto protect intellectual property. Most recently, we institutedsanctions against eight Chinese firms which we suspect oftrafficking in equipment that could be used to produce chemicalweapons. Negotiating, enforcing, and then insisting on the fullimplementation of agreements is the best path to progress. Thisis no easy task as our experience with the prison labor agreementillustrates. In 1994 we reached an agreement that Customs wouldbe able to visit factories to determine if products are made withprison labor. Our experience in this agreement has been mixed. Wemust be vigilant in insisting on cooperation to fully implementthe agreement.

The debate over our trade relations with Chinahas always been difficult, but this year there is a confluence offorces at work -- those rightly concerned about human rights, thetransfer of Hong Kong, the trade deficit, and religiouspersecution -- that make the challenge on Capital Hill tougherthan ever. The voices urging that we revoke normal trade statuswith China are louder this year and represent a broader range ofthe political spectrum. While these views are legitimate andimportant, revoking normal trade relations is the wrong way toattempt to solve those problems.

It is critically important that there be avigorous involvement on the part of the business in this debate.Businesses have both the means and the interest to build a sharedunderstanding with your employees, among the public at large and,of course, with Congress of the importance of U.S. engagement andleadership in the global economy. And that leadership depends onissues such as maintaining normal trade relations with China. Iurge you to let your voice be heard.

But involvement in the debate is not enough. Iwas speaking the other day to one of our most experienceddiplomats, who pointed out to me that 25 years ago our mostimportant international contacts were government to government.Today, they are business to business. That has brought tremendousopportunities to businesses around the globe. But it also bringswith it considerable responsibilities -- responsibilities thatare in the businesses’ own interests to fulfill.

Businesses today must play a role in advancingnon-economic objectives. Business can and must work withadvocates of human rights and labor in China to help promotebetter human rights conditions, higher labor standards, and therule of law. Sponsoring exchange programs with Chinese citizensso they can learn about our democratic standards here is onestep. Maintaining high standards in your operations and leadingby example in China are also critical steps to take.

John Kamm, who I believe is here today, has beenhonored at this meeting for his work in this area. His company,Asia Pacific Resources, a consulting firm assisting companiestrading and investing in China, has worked hard to promote humanrights and rule of law in China by working to obtain the releaseof individuals arrested for exercising their right of freeexpression, and for advocating strongly the benefits of humanrights to the business community and the Chinese public.John’s conviction that a good environment for human rightsis good for business is an example to us all.

Let me conclude by reiterating what I saidearlier. There is a confluence of voices this year in oppositionto maintaining normal trade relations with China. But if we allwork together, I believe we can develop the necessary support tomaintain normal trade relations with China. This is aprerequisite for ensuring stability in Hong Kong, making progresson helping to establish a more open economy in China, integratingChina into the global economy and dealing with human rightsissues in China. I thank you for your time, and I look forwardworking with all of you in the weeks ahead on this criticalissue.