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they were afraid—this is just a sense—they were afraid to talk with me on the phone, because they were afraid they were monitored by the operator or something.

Mr. ĠEJDENSON. The argument you always get when you're looking at sanctions like those that passed the House and the Senate, and things like MFN, is that it only hurts the people and it won't hurt the

government, or if it hurts the government, the real pain goes to the people and we shouldn't do it.

Mr. YE NING. Let me take an example. On a case-by-case analysis, some people may be hurt, it's true. But I would like to take an example. On May 27, the trade unions organized by Beijing workers, they issued a communique which said all the financial assistance from the West flowed into the pockets of the bureaucracies, and the debt was left for us generation and the future generations to pay back. So maybe on this point we should make the comparison: which is greater, which is heavier, the advantageous or disadvantageous?

Mr. KE GANG. I would like to say something about this. As far as the economic sanctions are concerned, I mentioned distinctions should be made between the centralized industry and the local industry, between the private sectors and the governmental sectors.

You know, if economic sanctions are put on the governmental sectors and the centralized industries, I think that is where the people are less likely to be hurt. If the United States provides a larger amount of money to the government directly, I don't think the people in that kind of centralized society, centralized economy, can benefit directly from that. The government is the one who can benefit from this directly. So if you target your sanction directly towards those areas controlled by the central government and the government-run factories, I think the people would be less likely to be hurt.

As I mentioned, the economic sanctions should be measured. The U.S. can still give a loan to the small enterprises and the local and private sectors, where the people can most benefit from it.

Mr. YE NING. Some organizations in and out of China, they just pointed out that nowadays the task for the Chinese people and the Chinese nation is to shorten the life expectancy of this regime. So at this point, which way will be effective to shorten, to fulfill that task, to create an economic and political crisis, that would be of best advantage to the Chinese people. On the other hand, this strong message you send with comprehensive economic sanctions will cause a split among the top leaders.

Mr. GEJDENSON. I want to thank both of you and commend you and all the people who are working with you for what you're doing and for the courage that you and so many others have exhibited. Thank you very much.

Mr. KE GANG. Thank you.
Mr. YE NING. Thank you.

Mr. SOLARZ. Thank you very much, gentlemen. We're very grateful to you for your courage and for your testimony.

The subcommittees will now hear from our final panel, consisting of Richard Gillespie, the Vice-president, United States-China Business Council; Peter Handal, the President of Victor B. Handal & Brothers, Inc.; and Howard Lewis, Vice-President for International Economic Affairs, National Association of Manufacturers.

Gentlemen, your prepared statements will be included in the record. In the interest of time, I think it would be in everyone's interest if you could briefly sum up your testimony in about five minutes.

Why don't we hear first from Mr. Gillespie, then Mr. Handal, and then from Mr. Lewis.

STATEMENTS OF RICHARD E. GILLESPIE, VICE-PRESIDENT, UNITED STATES-CHINA BUSINESS COUNSEL; PETER V. HANDAL, PRESIDENT, VICTOR B. HANDAL & BRO., INC., ON BEHALF OF THE AMERICAN ASSOCIATION OF EXPORTERS AND IMPORTERS; AND HOWARD LEWIS, III, VICE PRESIDENT, INTERNATIONAL ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUF CTURERS

STATEMENT OF RICHARD E. GILLESPIE. Mr. GILLESPIE. Mr. Chairman, we're grateful for this opportunity to testify at these hearings.

The United States-China Business Council, formerly called the National Council for United States-China Trade, is a private, nonprofit association of some 300 U.S. companies who do business in China, and has worked since 1973 to promote business with the PRC. But it's a U.S. business organization, not a spokesperson for any Chinese organization.

The Council, at its annual meeting last month, adopted a resolution deploring the killing and repression in Beijing and the apparent turning away from the policies of liberalization and reform. It is obvious that the business climate in China has undergone a dramatic change. China now has an unstable, hard-line leadership opposed to political reform and supportive of a return to central planning and control. How long this discredited regime can remain in power is impossible to gauge, but at some point-whether next year or five years from now-China will return to the policies we feel of reform and development. In the interim, we are working with our companies as they, along with the entire American business community and you in Congress, struggle to cope with the current situation.

Now, polls of our member companies conducted over the past three weeks reveal that although some U.S. companies have begun to resume operations in China, these are at much reduced levels and in an atmosphere which is far from normal. But after spending years developing the China market, large American companies are reluctant to walk away because we have so much at stake. After all, two-way trade in 1988 totaled over $14 billion. More than 600 U.S. firms with investment enterprises totaling more than $3 billion are active in China, and these investment enterprises range from oil exploration to the manufacturing trades, not merely cigarettes, but automation, automotive, aircraft, copiers, pharmaceuticals, chemicals and petrochemicals.

After pulling their expatriate staffs out of China, these U.S. businesses are trying to maintain the necessary contact with their Chinese counterparts while delaying decisions on future operations

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until the dust settles in China. And more than 600 companies with China investments are trying to keep these projects operating under very adverse conditions.

But the fact that large companies are not cutting business ties by no means implies business is normal. Many companies have yet to send back any expatriates, and only routine business is being conducted, as Chinese counterparts, preoccupied with the political situation, are in no mood to undertake any sort of bureaucratic risktaking. Very few substantive discussions are now taking place.

More importantly, new American investment is drying up, for the fundamental reason that China no longer appears to be the politically stable and economically vibrant country that it was previously. It will take more than Chinese verbal assurances to convince U.S. companies that the risks of undertaking new projects in such an unstable environment are worth the bother.

We believe, as do most companies we talk to, that China is going to face a severe foreign exchange squeeze as a result of the Tiananmen massacre. Tourism is evaporating, new World Bank lending, as well as most foreign government concessionary lending, is on hold. Commercial banks are wary of extending new loans. Hong Kong capital is skittish and importers here in the States, worried about timely delivery, are starting to divert some purchases away from China.

Now, even with the best of intentions, American companies cannot do business in China if there's no money, no foreign exchange. So some firms are beginning to slow down the infusion of new capital into their current projects in light of the projected slow down in China's economy. In fact, corporate America is waiting for the same things as the members of this committee before resuming business as usual in China: a return to political stability and normalcy and to economic liberalization and development.

The measured steps that the President has taken to date to show American outrage and to deny China some of the benefits of the United States-China relationship are quite appropriate, we feel. However, we question the need for further unilateral economic sanctions given the extent to which American companies have of their own accord reduced their economic activity with China. Rather than give a detailed sanction-by-sanction review in these remarks, I would like to concentrate on the problems we see with sanctions in general. Of course, I will be happy to answer your questions about individual sanctions.

First and foremost, additional unilateral sanctions will give the Chinese hardliners the opportunity to blame their economic woes on the U.S. Government rather than on their own behavior. Given the historical Chinese sensitivities about foreign domination, hardliners are quite capable of using the appearance of American interference as a xenophobic, nationalistic rallying point, which could have the perverse effect of prolonging their hold on power and hardening their policies still further. Also, unilateral sanctions are also likely to diminish the reservoir of good will for the USA that is so evident in the Chinese people, and also in the low- and midlevels of the Chinese government, both at the center and in the provincial and local level.

Furthermore, to the extent that the sanctions do have effect, they are likely to hurt exactly the people we want to help. Higher tariffs on imports to the United States, for example, will impact disproportionately on enterprises exporting labor-intensive products from the southern part of China which have been in the vanguard of economic reform.

A number of these enterprises are, in effect, China's private sector. Many of them, in fact, are run by American or Hong Kong companies whose own business would be sharply affected if imports from China were halted.

Our Council's position on sanctions is based on our belief that the Chinese integration into the world economy and contact with Western business have provided a powerful impetus for political, economic and social progress in China. By moving to dismantle the structure of U.S.-China economic cooperation, the U.S. Government will be shutting off the engine that is driving the process of change, both political and economic. It seems logically inconsistent to do this while calling in the same breath for increasing political change.

Where, then, should we go from here? The U.S. Government must continue to forcefully express its displeasure with events in China, and both the administration and Congress should continue to freeze military cooperation and high-level government contacts. We must bring home to the leaders in Beijing the damage they have inflicted on themselves.

Prior to adopting any further sanctions, however, the U.S. Government should continue the process of consultation with other Western countries to ensure that the reaction to events in China is coodinated and multilateral. U.S. high tech exports to China only account for about 10 to 20 percent of the worldwide total, and our credits to China are only a tiny fraction of those loans outstanding from Japan and Europe. Nothing that the U.S. Government does will be effective unless Japan and other Western countries follow suit.

For the Congress to unilaterally suspend most favored nation status, along with OPIC, Eximbank, and trade and development programs in China without comparable actions by other governments, will simply penalize U.S. exporters, importers and investors, without, for the most part, hurting China. Suspension of most favored nation status would, in effect, invite Chinese retaliation against American exporters of grain, lumber, plastics, resins and other commodities, and possibly retaliation against our own political and strategic ties.

Now, U.S. companies competing in the China market have had to deal with the legacy of giving Japan and Europe a 10-year head start in China due to the earlier failure of the U.S. to recognize the Chinese Communist government. It would be a pity to repeat this experience.

Much more importantly, our Government should do its best to preserve what can be preserved of the framework of the U.S.-China economic relationship in recognition of the importance of this relationship to positive change in China. The administration and the Congress should act with the realization that business is already applying the most effective sanction of all-a series of decisions to reduce economic activity with China based upon negative perceptions of the business climate. If our Government reacts with prudence and restraint, the Chinese government will reach the correct conclusions about the adverse consequences of its actions much more quickly, and the United States will be much better positioned to play a positive role when China returns to the path of reform.

Thank you, Mr. Chairman.
[The prepared statement of Richard E. Gillespie follows:

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