range missiles in the Middle East. The Fulbright_exchanges have been restored and the Peace Corps has been invited in.

Nevertheless, as the President has said on several occasions, we are disappointed that the steps China has taken have not gone far enough to address our concerns, much less to heal the self-inflicted wounds of last June. Under current circumstances, the sanctions initiated by the President will remain in place.

Mr. Chairman, we need to keep a clear view of what has helped to promote positive change over the past decade in China and avoid actions which would undermine the forces for progress which continue to operate in broad areas of Chinese society. Through five administrations, both Democratic and Republican, we have sought to nurture a relationship with China designed to draw the Chinese out of their isolation and encourage their cooperation on major international issues.

While in the 1970's China was viewed as a strategic counterweight to Soviet expansionism, this perspective has changed since our relations with the Soviet Union have improved. China's strategic role has evolved to encompass a broad range of global and international issues from missile and nuclear nonproliferation to resolving regional conflicts in Cambodia and on the Korean Peninsula.

Over the past decade since normalization we have built up with China a broad range of official and private contacts through institutions and on a people-to-people basis which have had a profound effect on political and economic reform and on Chinese perceptions of human rights. Lastly, we have sought to sustain bilateral commercial ties to China in part to encourage movement toward a market-oriented economy and to spur the development of multilateral trade and financial ties which would integrate China into the world economic system.

This is why we believe that to withdraw MFN at this uncertain juncture would reduce PRC incentives for reform and restraint in the human rights area. Instead, it would push China into isolation, further reducing our influence and heightening an atmosphere of confrontation that would very likely engender further political repression.

The loss of this incentive could put other important U.S. foreign policy goals in jeopardy as well. We want China to take into account our views on a wide range of regional and global issues, such as I mentioned, either missile proliferation or regional conflict resolution. Denying MFN would mean that China would have little more to lose by ignoring our concerns in these areas.

Let me emphasize, these economic linkages are essential to our ability to encourage and return to reform in China. MFN status provides the fundamental underpinning for our commercial relationship. Events worldwide reinforce our view that international commerce is an important catalyst for change. As we have seen in Eastern Europe and the Soviet Union, successful economic reform cannot occur in the absence of political reform.

Those who argue for denying China MFN also need to take into account the consequences for the millions of Chinese who now have a personal stake in reform and in contacts with the U.S. The immediate economic impact of MFN withdrawal would be to hurt

those segments of the economy that are the most dynamic, Western oriented, and have the strongest commitment to the marketplace. It would destroy the economic base of those very social forces, creating pressures for deepening economic and political reform.

Let me just briefly address the central legal question here, freedom of emigration. The Jackson-Vanik amendment requires that the President consider whether renewal of MFN waiver would substantially promote freedom of emigration. We believe that an extension of the waiver would do this. Approximately 17,000 citizens of the PRC emigrate to the United States every year. This emigration flow has continued without interruption since the military crackdown last year.

While the Chinese Government has imposed some new travel restrictions on graduate students, it has not altered its basic policy on emigration or other travel for nonimmigrant purposes. U.S. numerical limitations, and not Chinese restrictions, are the source of the limits on the number of Chinese who emigrate to the United States.

In our judgment, continuation of MFN status at this time will help to preserve the gains already achieved on freedom of emigration, and encourage further progress in the future. While China's MFN status tends to be viewed largely as an instrument of U.S. human rights and foreign policy goals, we must keep in mind that MFN is fundamentally a trade issue. And from this perspective, denying MFN status to China would have extremely damaging economic consequences for U.S. exporters, investors, and U.S. consum

ers.

Let me highlight these consequences just in summary. In the decade since the U.S. granted MFN status to China, bilateral trade has increased almost 700 percent, from $2.3 billion in 1970 to almost $18 billion last year. U.S. exports to China totalled $5.8 billion in 1989. China is now our tenth largest trading partner worldwide.

American companies are also investing in joint ventures in China. Over a thousand U.S. firms have committed more than $4 billion to joint United States-Chinese projects that sell products and services in China and in oversees markets. After Hong Kong and Macao, the U.S. is the largest investor in China.

Because denying China MFN status would sharply increase tariffs on Chinese exports, prices for U.S. consumers would significantly increase, with the burden of these price increases and shortages resulting from them falling most heavily on low-income consumers. Trade retaliation is almost certain. If we deny China MFN status, we would expect China to act immediately to withdraw MFN treatment for U.S. products, putting our exporters at a disadvantage in competing for sales with other foreign firms in what is potentially the world's largest market.

And, as I noted earlier, our major allies are not contemplating withdrawing MFN from China at this point. As costly as the impact of denying MFN on China would be on the PRC and the U.S., the most severe impact is likely to be on Hong Kong, a small territory, whose colossal economic success has made it a paragon of free market policies. As Hong Kong's governor, Sir David Wilson,

recently put it, denial of MFN would deal a body blow to the future of territory, uncertain as it is.

Hong Kong companies have invested in more than 2,500 South China enterprises. The Hong Kong Government estimates that about 20,000 Hong Kong manufacturing jobs would be lost if MFN were denied.

In addition, Hong Kong continues to be a major entrepot for Chinese exports. Almost half of Chinese exports transit through Hong Kong. Denial of MFN to China would cause catastrophic losses to those Hong Kong enterprises, including many which are American owned, which produce U.S. bound exports in cooperation with Chinese enterprises.

The United States also has important economic interests in Hong Kong of itself. The territory is one of our larger trading partners in Asia, with bilateral trade totalling $16 billion. The United States has invested approximately $5 to $6 billion in Hong Kong, and over 900 U.S. firms have established a presence in the territory.

Their profitability depends on both the health of the Hong Kong economy and on the United States-China trade. The American Chamber of Commerce in Hong Kong reports that 70 percent of its member companies would suffer from a loss of MFN to China, and half would have to consider reducing staff or otherwise cutting operations.

In summing up, I would emphasize that our policy toward China seeks to encourage reform and human rights through a considered mix of engagement and sanction. The President has decided in favor of extending China's MFN status because it serves clear U.S. interest in promoting our objectives of reform, modernization and the advancement of human rights, of maintaining productive official contacts, of protecting the interests of American business and American consumers, and of working to maintain Hong Kong's stability and future viability.

The extension of MFN does not in any way imply acquiescence to political repression and human rights violations. The sanctions initiated by the President in June of last year and those enacted by the Congress last February remain essentially in place. These measures clearly define our dealings with the current regime in Beijing as significantly less than normal.

We hope that the Chinese leadership will soon build on the steps it has taken, modest steps though they are, to relieve repression and address other U.S. concerns, so that the American people, the Congress and the administration can be satisfied of its intention to improve relations and return to its earlier commitment to political and economic reform. But we should not let our frustration over the slow pace of Beijing's response lead us to take unilateral actions which will harm millions in China who look to us to keep their country open, actions which would undercut vital long-term U.S. interests.

The central authorities in Beijing would not bear the brunt of MFN withdrawal. Indeed, they would try to turn it to advantage by laying the blame for their economic problems on outsiders. The real losers would be China's economic reformers and workers in export industries, along with those Chinese hoping to emigrate, and the people of Hong Kong. And put at greater risk would be

American economic and strategic interests in the long term and stable relationship with the People's Republic of China.

Thank you, Mr. Chairman.

And now I will do my best to answer your questions. [The prepared statement of Mr. Solomon follows:]

PREPARED STATEMENT OF RICHARD H. SOLOMON

Mr. Chairman, members of the committee, I appreciate this opportunity to testify on behalf of the administration on United States-China relations. Last year's massacre at Tiananmen Square still haunts all of us. that tragedy, and the continuing repression by Chinese Government, require that we reassess our approach to managing the United States-China relationship.

Many in Congress have expressed concerns about responding more forcefully to signs of continuing political repression in China. These concerns are now embodied in the debate over the continuation of China's most-favored-nation (MFN) status, which for many is a symbol of our overall policy toward the People's Republic of China. Therefore, I would like to lay out for you today our thinking that underlies the President's decision to extend China's MFN waiver as part of our overall policy approach toward China, and examine our policy both in light of Chinese realities and United States interests.

The dilemmas of our current China policy bring to mind F. Scott Fitzgerald's observation that the mark of a first-rate intellect is the ability to keep two opposing ideas in one's mind and still be able to function. The foreign policy equivalent is what we have done consistently since Tiananmen: balance the competing demands of hard-nosed national interests and our national values, aspirations, and ideals. Our approach is to try and preserve a key relationship that serves important national interests, while at the same time sending a clear message that Beijing's human rights performance has been-and remains unacceptable, precluding a fully normal relationship.

Let us be clear. This administration regards the situation in China with regard to the protection of human rights as deeply disturbing. Despite the release of several hundred political prisoners, many others remain in detention-apparently solely because of their advocacy of certain political viewpoints or participation in last year's peaceful demonstrations. Their names have not been made public. Those accused of crimes in connection with last year's events have not been afforded the opportunity of an open, public trial. The careers of many who demonstrated have been damaged or ruined.

The Chinese press, which reported the events of last spring with remarkable freedom and objectivity, has again been shackled. Mandarin language broadcasts of the Voice of America are still jammed. Public expressions of dissent are not tolerated. Western reporters have been harassed; and just last weekend several were beaten up by PRC security forces-despicable behavior which we have protested to Chinese authorities. And we are also concerned about reports of official harassment and intimidation of China's students here. Such actions, if a consistent pattern, violate our laws; and we have told the Chinese authorities that there are consequences for this kind of behavior.

President Bush was emphatic on Human Rights Day on this past May 13 when he called on the American people to "observe this day in the spirit of commemorating those who died (at Tiananmen); drawing inspiration from the courage of those who held fast to their ideals in the face of violent suppression; and urging the Chinese Government to respond positively to the fundamental aspirations for freedom expressed in last year's demonstrations." And as the President added on the June 4 anniversary of Tiananmen, "America will always stand with those who seek greater freedom and democracy.'

Last year's outrageous killing of nonviolent demonstrators by troops in Beijing caused the administration and the Congress to impose a series of sanctions on China. Other democratic countries took actions in parallel with our own. Evidence of continuing repression of dissent in China now prompts a desire by many in this country to strike back—by imposing still more sanctions.

Mr. Chairman, there is no dispute about the importance of promoting our interests in human rights and economic and political reform in China. This set of goals is shared by both the administration and the Congress. At issue is what are the most effective means to achieve these objectives.

For those who seek to escalate sanctions against China, revocation of MFN is a ready response. I recognize that, in the minds of many, the issue of whether to

extend China's MFN status for another year does not really hinge on its relevance to progress on freedom of emigration, although this is the explicit condition for the waiver under the Jackson-Vanik amendment. Nor is the commercial impactwhich, as I will explain shortly, is substantial-a primary consideration for either the administration or the public. Rather, there is widespread concern that we find some effective form of rebuke to express our outrage at Beijing's reprehensible behavior.

Some of the Chinese students in this country argue that the United States should escalate sanctions to the maximum extent possible, and use MFN as a weapon to devastate the Chinese economy and deepen China's international isolation. These voices believe that the plight of their countrymen must be made much worse before the Chinese people will rise up and rectify the situation. And they calculate that the withdrawal of MFN is one way to create the conditions for upheaval.

We find this "worse is better" logic flawed and inappropriate as a basis for national policy. Such an approach would inflict greater hardship on the Chinese people; but it would not, in our view, achieve the desired goals of improving the human rights situation or encouraging a return to economic and political reform. Instead, it would eliminate such influence as we have, penalize American business, and strengthen conservative, isolationist elements within the Chinese leadership. In short, it is the wrong instrument.

This is why, after careful deliberation, the President has concluded that-on balance, and in view of other sanctions that remain in place-MFN status for China remains in the United States national interest. And he has acted to renew China's MFN waiver under the Jackson-Vanik amendment (section 402) of the 1974 Trade Act for another year. Our recommendation and the President's decision were difficult to make in light of the lack of fundamental progress in China toward healing the wounds of last June. In the end, the President concluded that denial of MFN would inflict serious harm on the many intellectuals, workers, managers, and officials inside China who struggle daily to keep alive the flame of reform and openness to the outside world.

We cannot break faith with the people who count on us by destroying the basis of commerce with China. Trade is not just a cold set of financial transactions between our two countries; it is a primary channel for contact between Americans and Chinese, for interchange of ideas and values which has contributed significantly to the progressive developments in China over the past decade. Commerce is a force for change; and as we have seen this past year in dramatic developments around the globe, economic modernization, and the workings of the information revolution bring with them ineluctable pressures for political reform as well.

Let me emphasize that granting MFN is in no sense an act of approval of a given country's policies. It does not mean that the country in question is our most favorite nation. The term "most favored nation" is something of a misnomer: it merely means that normal nondiscriminatory tariff rates-currently applied to all but a handful of our trading partners-will be in effect for our trade with the country to which it is granted. MFN is not a preferential or concessional trade status. Many countries with which we have profound differences-Iraq and Syria, which have been on our terrorist list; and South Africa, against which we have broad sanctions-have retained MFN status. None of our friends and allies amongst the democratic countries are contemplating the Draconian step of withdrawing China's MFN status.

FROM REFORM TO TIANANMEN

Let me put the current debate on China policy in some historical context. The brutal attacks ordered by the PRC leadership against peaceful and unarmed demonstrators at Tiananmen last year shattered our idealization of a modernizing China; of an enticing and exotic country of Panda bears and ping-pong diplomacy. For the Chinese people, the violent suppression of earnest dissent was a crushing event of profound proportions. It is likely to weigh heavier in Chinese history than the "May 4" demonstrations of 1919, from which last year's student-led demonstrations drew inspiration.

1989's seminal events and the continuing repression imposed by the leadership in Beijing clearly pits two opposing objectives against each other: the recognized need to rapidly modernize a still largely rural society of a billion people; and the desire for unchallenged control by the Chinese Communist party. The question of how to obtain the fruits of science and technology from the West, yet not dilute or undermine Chinese culture and political authority, is a longstanding dilemma that Chinese leaders have been trying to come to grips with for nearly a century and a half.