Mr. GEJDENSON. Yes, just if we left everything alone, where do you see it going? Mr. GILLESPIE. Probably leveling off. Two-way trade up through April of the year was at a level above 1988, which was a banner year. Even without the Tiananmen suppression, however, the impact of China's retrenchment program begun last September would be to level off trade, and probably decrease it. Mr. GEJDENSON. That started basically because they chewed off more than they could bite. They had gone in and started too many projects. They didn't have the loan capacity or the capital to continue them. That wasn't a political decision of retrenchment; that was simply the reality of their own failed economy. Mr. GILLESPIE. That's right. If there hadn't been a Tiananmen Square, we probably would have stayed right around $14 billion, or a modest increase. Of course, Tiananmen has changed everything. We are already seeing the Chinese foreign exchange in a greater squeeze. For example, last year China received over $2 billion worth of income from tourism, and that's down to a trickle right now. China needs that tourism money in order to minimize its unfavorable trade balance, which is steadily increasing. That money is also needed to make foreign exchange available through the various foreign exchange swap centers in the cities on the coast for use by U.S. and foreign investment enterprises who have a surplus of a local exchange and need to exchange it for foreign exchange. Hotels in the past have provided foreign exchange for the swap centers. So basically I see that with the changed environment, and I think American industry is pretty well stopping any new investment ventures. I think you're going to see a decrease in our trade. What you do have right now is American businessmen saying it's a new situation in China. We thought up to Tiananmen Square that child was one of the most stable environments in Asia. We now know it's a politically volatile environment; we fear that the power struggle will continue after Deng Xiaoping's passing, and that some of the reforms may be rolled back. The operations we think will continue in China will be those that could survive, say, in a 1980-84 environment. It's just not worthwhile trying to try anything new in China. I think it is going to hurt China particularly in 1990, 1991. Mr. GEJDENSON. Mr. Gillespie and then Mr. Lewis, what percentage of your business activity for your groups is presently related to Chinese government purchases, whether it's the military or nonmilitary? Mr. LEWIS. For the National Association of Manufacturers? Mr. LEWIS. None, as far as Mr. GEJDENSON. None of the products you sell to China are purchased by the government? No computers bought by the military, no Mr. LEWIS. Do you mean our members or the National Association of Manufacturers? Mr. GEJDENSON. Your members. Mr. LEWIS. I can't answer that. Mr. GEJDENSON. You have no statistics on that? Mr. GILLESPIE. I might be able to-That's a tough question to answer, Mr. Chairman. If you start talking about how many of our members right now are selling military equipment, say, to the Chinese military Mr. GEJDENSON. Or computers to government agencies or what have you. Mr. GILLESPIE. China is in a transition right now, where they're shifting control over their economy away from ministries into corporations. You have seen for the past three years the development of a very broad private sector, where rather than the Ministry of Electronics buying things, several of its corporations under the Ministry are actually buying the equipment. I would say that probably the bulk of our exports to China now are going to the new private sector, the new private sector agencies in China. Mr. GEJDENSON. Mr. Handal. Mr. HANDAL. Mr. Chairman, there's three layers. One is the government. The other is the government corporations, and then there is actual private enterprise. In our industries, we don't do any business with the government. We used to do all the business with the government corporations, and that has switched dramatically to the Hong Kong joint venture type private enterprise. Mr. GEJDENSON. It seems to me about two years ago or so, maybe it was longer, there was a drop off in American purchase orders to China. Maybe my time frame is off a little bit. They were having a lot of trouble on deliveries and the quality of goods, especially in the textile industry. Was that the government-run corporations not being able to deliver? Did you run into those types of problems? Mr. HANDAL. Yes. The government-run corporations are just bureaucratic messes and they're very difficult to do business with. Mr. GEJDENSON. And how many of your Mr. HANDAL. I hope that doesn't get back to our suppliers. Mr. GEJDENSON. What percentage of the representatives of U.S. companies in China have returned since June 4th? Are your people back in China now, Mr. Handal? Mr. HANDAL. Our people are based in Hong Kong. They would be Hong Kong Chinese. They're all in Hong Kong and won't go back to China right now. Mr. GILLESPIE. Basically, we're relying in large measure on U.S. embassy statistics, that about 50 percent of U.S. companies have sent some expatriates back to China. Companies have had to send some expatriates back to ensure that their foreign investment ventures are moving along and they can quality control the output. I Also think you will see by the end of the month that the bulk of the U.S. companies that have Beijing offices-I think there are 160 Beijing offices there-will have sent some expatriates back in at least for visits. Perhaps if they've had four there, they'll send one this time, send them back in for short visits. Senior executives from most companies are staying home for fear the Chinese leadership will propagandize their visits. But they have to send people back for short reconnaissance trips either to Beijing or Shanghai or particularly into their ventures to keep them going. Mr. GEJDENSON. The Chinese government provides its own OPIC, it's own political instability insurance, which I find somewhat amusing. Are any of your companies covered by OPIC and the Chinese, or just the Chinese political risk insurance? Mr. GILLESPIE. Only a small number of our companies have OPIC insurance. A larger number are insured with U.S. companies such as AIG or the CHUBB Group or are not insured at all. I know of no American companies who have taken Chinese political risk in surance. Mr. GEJDENSON. You don't use any of the Chinese insurance, any of your people? Mr. LEWIS. I can't answer. Mr. GEJDENSON. Can you estimate what percentage of your companies' overall imports per year from China of textiles and apparel would become prohibitively expensive if MFN was removed? Mr. HANDAL. I did not look at all of the duty rates in preparation for this testimony, but I looked at most of them. Virtually all of ours went to 90 percent, which would make it uneconomic. Mr. GEJDENSON. Where would you move that? Mr. HANDAL. It depends on how much of a rush I was in and how desperate I was. Mr. GEJDENSON. If we gave you a nice easy time and said your contracts run through spring, we'll give you early summer in case things run a little slow, where would you go? Mr. HANDAL. A lot of other countries in East Asia and then in the Caribbean, places like Indonesia, Malaysia, Bangkok, and then the Caribbean. Mr. GEJDENSON. Let me say I really appreciate this panel's patience in waiting so long, and if you have something more to add— go right ahead, Mr. Lewis. Mr. LEWIS. Yes. I wondered if, at the risk of prolonging this more Mr. GEJDENSON. Take your time. Mr. LEWIS. Several times today statements have been made about the success of the early 1980's sanctions against Poland which I just don't feel we should let pass, as somebody who worked deeply on these controls with American companies. First of all, I'm not quite sure what you're talking about when you're talking about sanctions on Poland because you also are wrapped up with U.S. sanctions on the USSR and our response to what they were doing in Afghanistan and Poland at that time. So it's a complicated issue when you talk about these sanctions. Are we talking about the grain embargo? Well, I don't find it is very successful, at least in my definition of success, when what we're busy denying the Soviet Union in the early Eighties we're busy subsidizing in the mid-Eighties. Are we talking about the control of petroleum equipment? Mr. GEJDENSON. They were particularly appreciative of the emgo on drilling equipment. WT. LEWIS. Right. And as this subcommittee knows only too and it was documented ad infinitum-the Soviets got the ioment. we talking about some of the minor actions taken against I think we denied their airlines landing rights at Kennedy Airport. Well, you know that just is not going to change a government's actions. In fact, one of the speakers earlier today actually equated the Poland sanctions with the reforms in Eastern Europe that are going on now. I think that is a gross misinterpretation of history which I don't want to let go by. Mr. GEJDENSON. I won't argue with that. But I guess the flip side of that question is, would we be seeing the pressure for change because of economic failure if we had not participated in Cocom, if we had provided unlimited loans and assistance to the East Bloc? I'm not from the hard-line school on these programs, and I recognize the failings of sanctions and restrictions. But again, if you go back during Stalin's purges, should business have continued as usual? You know, it is hard during the activity to be a perfect judge of what the proper response is. Simply whether or not the sanction topples the government or changes the policy is not the only litmus test. During kristallnacht, when the Nazis began their rampage, it would be difficult even today, knowing all of history, to say because there was one more pogrom in Europe that the United States ought to change its policy to a rising economic power and strong Germany, that it's certainly not going to change; it will isolate the Nazis; it won't-Again, I'm not saying that that's the level we're playing on today, but it is awfully difficult, without hindsight, to determine where that line is. Whether it works or not, maybe the United States is the moral leader of the Western world, which I hope it is, and at some point we may have to say that we're drawing the line here. What we do may not be effective, it may cause injury to our own citizens and our own economy, in fact, but the outrage that has occurred has just crossed that line in the sand for us. When Pol Pot took over in Cambodia, not only was it difficult to see where it would lead, but they basically imposed their own isolation. We didn't have to respond by cutting off economic relations. So I think you're right. If you try to make a case in history that economic sanctions unilaterally imposed by the United States somehow toppled governments or changed the very nature of the Communist system of government in Eastern Europe, that would be a very tough case to press. But I can't accept that when we watched Stalin's purges-people estimate as many as 15 or 20 million Russians may have been liquidated by Stalin-that business as usual, had we exchanged serious economic activity, would have been acceptable. The same thing in Afghanistan. If you are an Afghani and if those were your cousins and neighbors out there being blown to bits by bombs and what have you that the Soviets were bringing in, your line is in a little different place in the sand. That's what we're trying to figure out here, is how, without simply being Don Quixote and charging at windmills, can we send a very serious message to the Chinese government, try not to do too much damage to American corporations, but also not simply say "well, that's their business, it's their people, and we're just going to go on and try to make a profit here.' Mr. LEWIS. I don't disagree with anything you said. I started my testimony by admitting I wasn't an expert on U.S.-China relations, so I probably should end it by admitting I'm not an expert on U.S. Easter Europear relations. But, I think most of the change in Eastern Europe as well as in the Soviet Union comes not from ece nomi sanctions, very little of it, but rather, the failure of ther I think you asked exactly the right question. How do we respond.” Vna: I hope I have pointed out in my testimony is there are differen: way u respond beyond just export controls and shooting our serve in the foot. There are serious diplomatic initiatives that I inmk car be effective and that we, as a nation, often discount F tor meffectual. There are serious measures that can bring pressure or governments that don't necessarily involve cutting off U.S. er GLAESPE. Can I make one final comment? WIT GLIDENSON. As many as you like. You were patient enough WT GILLESPIE. Again, I think U.S. business has a moral conscience. and I think basically, if the situation in China got worsesay there is an extended ugly purge and the use of force is repeat- some point I think you probably would find U.S. business suppering sanctions. Me and feel sanctions would be effective now. What the Bush amministration is doing is a good first step. Should the U.S. Government decide on further sanctions, there would then need to be a lot reparation to make sure they're multilateral. Let's talk about MEN erfication. If we unilaterally withdrew MNF-I suspect we would have trouble getting our European and Japanese allies also e-it really would be a suicidal, self-destructive act. The Chinese would almost certainly retaliate. They would raise ars on some of our key imports to China on grain ($700 million sales last year) fertilizers ($200 million), aircraft and parts ($334 or wood products ($600 million) and plastics and resins ($560 mon. The Chinese can play the same game and retaliate. But what concerns me more is the fact that they might retaliate our own strategic relationship. I was in government during the Tus and I saw that relationship develop. It developed basically because of our common strategic and political interest, and along with that materialized a common business interest. I think you have to be very, very careful about withdrawing MFN status if you don't prepare and get Europe and Japan to do it at the same time. In the area of export controls, the Bush administration has stepped liberalization, which we think is good, even though U.S. business pay a price. If you look at our own exports to China, it is Sear that Cocom restrictions hurt us more than they do our allies. Sindustry, by supporting what the Bush administration is ing-by not further liberalizing Cocom restrictions-is willing to the price for it. But we think that's far enough to go. Were you to talk about restricting and reducing the green zones now, you would be asking Cocom to restrict these for foreign and human rights reasons. In the past, they have been ameTe to the restrictions for national security reasons, but China is threat right now. So I think we have to keep these problems d. If the situation deteriorates further, then what the U.S. |