Technology, Trade, and Security Issues Between the United States and the People's Republic of China: A Trip Report, August 1997

Technology, Trade, and Security Issues Between the United States and the People's Republic of China: A Trip Report, August 1997

98-617 STM
CRS Report for Congress
Received through the CRS Web
Technology, Trade, and Security Issues
Between the United States and the People’s
Republic of China: A Trip Report, August 1997
June 30, 1998
(name redacted)
Specialist in Technology and Telecommunications Policy
Science, Technology, and Medicine Division
Congressional Research Service ˜ The Library of Congress

ABSTRACT
This is a trip report based on discussions held with both Chinese and U.S. officials and
business leaders in China during 1997. The CRS representative was part of a U.S.
congressional staff delegation which visited Beijing, Xi’an, Shanghai, and Hong Kong.
Discussions during the two weeks in China covered three major policy areas: technology,
trade, and security. Developments since August 1997 indicate that these three areas
continue to be subjects of great interest between the two nations. This report provides an
analysis of both U.S. and Chinese perspectives on these issues at the time of the visit, and
a brief update regarding issues since August 1997. It is part of a series of trip reports written
by CRS analysts on southeast Asia. It will not be updated.

Technology, Trade, and Security Issues Between the United
States and the People’s Republic of China: A Trip Report,
August 1997
Summary
From August 12th through August 20th, 1997, a congressional staff delegation
visited the People’s Republic of China. This report provides the research findings
of this group, which was sponsored by the U.S.-Asia Institute, and was the 37th such
trip undertaken since 1979 to increase the understanding between the two nations.
The U.S. group was comprised of seven congressional staff from the House of
Representatives, the U.S. Senate, and the Congressional Research Service. The
delegation met with Chinese industry and business leaders in Beijing, Xi’an,
Shanghai, and Hong Kong. The group also met with several U.S. State Department
officials and representatives of U.S. industry doing business in China.
The meetings focused on many policy issues. However, three themes emerged
during the two weeks of discussions: technology, trade, and security issues between
the two countries. Since August 1997, technology, trade, and security issues have
become more prominent and perhaps more contentious. Several of the specific issues
discussed, such as the trade imbalance between the United States and China (and the
composition of that trade), China’s membership in the World Trade Organization
(WTO) and Most Favored Nation (MFN) status with the United States, and human
rights issues as a form of international diplomacy and relations, are still important
concerns between the two nations
In Beijing, discussions with Chinese officials, U.S. business representatives, and
U.S. Department of State staff focused on overall technology, trade, and security
issues between the two countries. These included the merchandise trade deficit that
the United States has with China, the growth and trend of the deficit, China’s
Membership in the World Trade Organization, Most Favored Nation status with the
United States, and linking trade policy to non-trade issues, such as human rights.
Discussions in Beijing also concerned technology transfer and proliferation issues
between the two countries. In Xi’an, the political and cultural history of China put
many of the PRC’s current issues into perspective. High technology development
and agricultural trade issues were also discussed. In Shanghai, technology and
capital formation, the roles of state-owned enterprises and multinational enterprises,
and telecommunications and the growth of the Internet were topics of discussion. In
Hong Kong, the turnover of the island from British to Chinese rule, political freedom,
and territorial sovereignty issues were discussed.

Technology, trade, and security issues continue to be important components of
the relationship between the two countries. Important issues and developments since
August 1997 have included President Jiang’s visit to the United States, an economic
slowdown in Asia, a worsening trade balance between the two nations, technology
transfer and proliferation issues, and President Clinton’s visit to China in June 1998.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Beijing (August 12th - 16th) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
An Overview of Technology, Trade, and Security Issues . . . . . . . . . . . . . . . 2
Trade Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Linking Trade to Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Technology and Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Xi’an (August 15th - 17th) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
High Technology Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Agriculture Exports and Sanitary Standards . . . . . . . . . . . . . . . . . . . . . . . . 13
Political and Cultural History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Shanghai (August 18th - 21st) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Technology and Capital Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SOEs and MNEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Telecommunications and the Internet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Hong Kong (August 22nd and 23rd) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Hong Kong After July 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Political Freedom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Territorial Sovereignty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Epilogue: Developments Since August 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Technology, Trade, and Security Issues Between
the United States and the People’s Republic of
China: A Trip Report, August 1997
Background
This report provides research findings from a two week trip to the People’s
Republic of China (PRC), August 12 to August 20, 1997.1 This trip was sponsored
by the U.S.-Asia Institute, and was the 37th such trip undertaken as part of that
organization’s efforts to expand the knowledge and understanding between the
United States and China. The U.S. group was comprised of seven staff members
from the House of Representatives, the U.S. Senate, and the Congressional Research
Service. The delegation met with Chinese industry and business leaders in Beijing,
Xi’an, Shanghai, and Hong Kong.2 The group also met with several U.S. State
Department officials and representatives of U.S. industry doing business in China,
to obtain their perspectives. The views and opinions expressed by members of the
U.S. delegation reflected either their own perspectives or the perspectives of the
Members of Congress they represented, and did not necessarily reflect official U.S.
government policy.
The meetings focused on many policy issues. However, three themes emerged
during the two weeks of discussions: technology, trade, and security issues between
the two countries. Since August 1997, technology, trade, and security issues have
become more prominent and some more contentious. Several of the specific issues
discussed included the trade imbalance between the United States and China (and the
composition of that trade), China’s membership in the World Trade Organization
(WTO) and Most Favored Nation (MFN) status with the United States, and linking
human rights issues to trade policy.
Other issues touched on during the two weeks of meetings last summer have
since emerged as critical in Sino-American relations. These include technology
transfer and U.S. export control policies, the financial health and economic growth
of China and Hong Kong, and the delicate issue of foreign influence on domestic
politics and policies. On several of these issues, concerns raised on both sides during
the two weeks of meetings were addressed. As a result, a greater understanding of
national policies was achieved on both sides. In other areas, concerns remained and
issues were left unresolved.
1In this report, China and PRC are used interchangeably.
2The chapters in this report are organized chronologically by itinerary. For a complete
listing of people the delegation met, see References.

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Despite differences that may exist between the two nations, the meetings also
reflected the deep desire for American congressional staff and Chinese policymakers
to learn more about each other, to exchange ideas, and to find common ground. The
Chinese hosts at every meeting in every city extended a gracious hospitality. The
Chinese sponsors of this trip also ensured that the delegation had the chance to enjoy
the great cultural heritage that China has, and in this way provided a context of
China’s history, politics, and economic growth. Members of the group were
impressed by the broad size and scope of the Chinese nation, from the Great Wall
outside of Beijing to the dynamism in Hong Kong, and from the rural expanses of the
Shaanxi province to the growth of development in Shanghai.
Beijing (August 12th - 16th)
Most of the meetings that took place in Beijing concerned broad trade and
political issues between the United States and China. The congressional staff
delegation met with senior Chinese government officials, former members of the
government (both civilian and military), officials in the U.S. embassy, and with
representatives from the Boeing Corporation.
An Overview of Technology, Trade, and Security Issues
It became apparent during two weeks of discussions that China’s national
technology policy is viewed by many policymakers, business leaders, academics, and
others as the engine for China’s future economic growth and development.3
Invigorating scientific research and access to technology innovation are at the core
of China’s economic plan for the 21st century. Part of this strategy is a domestic
policy targeted at strengthening internal science and technology (S&T) resources.
This strategy is also global. China seeks to obtain a wide range of scientific and
technological resources to hasten its development. Its relationship with the United
States, both in cooperation and competition, is viewed by many as critical to
nurturing and improving its technological capacity.
Chinese national technology policy is a complex mix of centralized
industrialization, state-run technology parks, and economic development zones.
While there is a coordinated national policy from Beijing, pockets of local
entrepreneurial high technology have sprouted all over the country. There also
continues to be a reluctance to openly exchange many forms of scientific research
and technology innovation with foreign entities. Yet China appears eager to embrace
the best and the brightest that foreign research and development sources have to
offer. This ambivalence was not surprising. It is a country that at once appears to be
coming into 21st century as an advanced, developed nation, while parts of the country
3Discussions with Yang Jiechi, Assistant Foreign Minister, Ministry of Foreign Affairs
Beijing, 14 August 1997; Chong Wang, Senior Manager of Public Relations and
Advertising, China International Economic Consultants Co., Ltd. Beijing, 13 August 1997;
Cheng Zhen-deng, Senior Engineer, The State Science and Technology Commission,
Beijing; and Sun Dejiang, Deputy Division Chief Engineer, Department of Planning, The
State Science and Technology Commission, Beijing, 13 August 1997.

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struggle to move beyond a largely agrarian past. Therefore, China’s national policies
at once embrace foreign sources of technology while at the same time reflect some
suspicion of the outside world.4
Like many other newly industrializing economies, China’s policies are heavily
focused on applied research and technology commercialization. Several areas of
scientific research and technology development stood out as priorities for China:
telecommunications, information technology, aerospace, biotechnology, agricultural,
and energy. In all of these areas, the Chinese consistently expressed a strong desire
to improve scientific cooperation and technology transfer between the two nations.

Trade Issues. U.S.-PRC trade issues were consistently discussed during the
two weeks the delegation was in China. However, during the time in Beijing, when
most of the discussions were with Chinese political and policy leaders, trade issues
dominated. The four major U.S.-PRC trade issues were:
! The worsening U.S. trade deficit with China. In 1987, the United States had
a $2.8 billion merchandise trade deficit with China. By 1996, the
merchandise trade deficit surged to $39.5 billion, and in 1997, it was $49.7
billion.5 From 1991 to 1996, U.S. exports to China increased by 90.5%, while
U.S. imports from China increased by 171.4%.6
! The composition of goods and services traded between the two countries, and
why this composition is important to U.S. policymakers. According to the
U.S. Department of Commerce, in 1997 small and medium-sized electrical
machinery, toys and sports equipment, and footwear accounted for almost all
of the imports from China to the United States. In terms of U.S. exports to
China, large-scale machinery, aircraft and spacecraft technologies, electrical
machinery, and fertilizers constituted the majority of merchandise exported in
1997. Talks between Chinese officials and the U.S. delegation revolved
around whether this trade composition is a reflection of real market demand,
or whether tariff and non-tariff barriers are causing distortions in trade
composition.
! China’s Most Favored Nation (MFN) trading status with the United States is
not permanent but conditional. U.S. policy has been that certain issues need
to be addressed by the Chinese before MFN status becomes permanent.
Chinese officials contended that this is a serious issue for the Chinese people;
some in the U.S. delegation contended that trade, security, and human rights
issues must be addressed in China before MFN can be approved.
4Discussions with Cheng Zhen-deng, Senior Engineer, The State Science and Technology
Commission, Beijing and Sun Dejiang, Deputy Division Chief Engineer, Department of
Planning, The State Science and Technology Commission, Beijing, 13 August 1997.
5Department of Commerce, Bureau of the Census, The World Trade Atlas, 28 May 1998.
6Congressional Research Service, China-U.S. Trade Issues, by (name redacted), IB9112
[updated regularly], p. 1.

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! China’s acceptance as a member of the World Trade Organization (WTO).
The Chinese consider WTO membership as an important step which would
indicate recognition of China’s importance in the global economy. Some U.S.
policymakers have economic and non-economic concerns regarding China’s
WTO membership. Among the issues discussed were those linking WTO
membership to ensuring U.S. access to Chinese markets, greater
democratization in China, improvement in PRC human rights issues, greater
access to information through the Internet and telecommunications
technologies, and improving U.S. export control policies to China.7
Major points of contention between several members of the U.S. delegation and
Chinese officials during meetings in Beijing were the size of the trade deficit (which
is large), the direction the deficit is taking (growing larger each year), and the
composition of the trade (small manufactured goods from China, advanced
technologies and value-added services from the United States). Several members of
the U.S. group expressed the opinion that it was likely that any improvement in the
U.S.-PRC relationship would have to start with a change in the trading relationship
between the two nations.
Chinese Position. In response to U.S. concerns about the size, structure, and
composition of the trade deficit, Chinese policymakers emphasized their view that:
! The current merchandise trade deficit with the United States, and particularly
a significant reduction in U.S. exports to China, is a temporary aberration and
will be brought to equilibrium by free market forces.
! While the trade imbalance with the United States may create tensions, the
Chinese policymakers contend that it is the result of market forces at work,
and not central government planning.
! The U.S. government has not accurately taken into account Hong Kong trade
as part of the PRC trade equation with the United States, nor accurately
accounted for U.S. firms manufacturing goods in China for sale in the United
States.
! The United States harms itself by maintaining complicated and unwise export
control policies, particularly for dual-use technologies and atomic energy.
These technology exports to China could greatly improve relations between
the two countries as well as helping redress the trade imbalance issue.
U.S. Delegation Position. On each of these points, several members of the U.S.
group sought to clarify the U.S. position as well as address Chinese concerns. The
U.S. groups’ views, while not always unanimous, are summarized in the following
points.
7While these were issues raised by the U.S. group during this trip, it should be noted that the
U.S. Trade Representative does not link specific trade issues with non-trade issues in
discussions with Chinese officials.

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! The trade deficit trend line between the United States and China can be traced
over several years, and is neither a one year aberration nor a short term
development.
! While honest disagreements can exist regarding trade policies between
nations, much more can be done to eliminate Chinese tariff and non-tariff
barriers on U.S. imports.
! While there may be some accounting discrepancies between the two nations,
U.S. officials do not view this as a major contributing factor to the trade
deficit between the United States and China.
! U.S. export control policies are of concern to many U.S. policymakers, yet
reflect a balance between national security and economic opportunities for
U.S. firms.
Linking Trade to Other Issues. Two very contentious policy issues—MFN
status and membership in the WTO — led to a broader policy question often
discussed between the U.S. delegation and their Chinese hosts (as well as debated
within the U.S. delegation). Should the United States link trade and non-trade
political issues—such as human rights—when dealing with China?
MFN Status. MFN treatment is conferred when one country extends to another
any trade concessions, privileges, and immunities which that country has granted or
will grant to any trading partner. In other words, trade between the two nations is
conducted with tariffs that are set at the rate lowest among common trading partners,
rather than at higher full rates. The United States has extended MFN status to all but
a few nations, but never extended permanent MFN status to China. It had suspended
MFN status with China between 1951 and 1980, but then revoked the suspension
when diplomatic relations between the two nations were restored. From 1980
through 1989, annual renewal of China’s MFN status was generally uncontroversial,
with some congressional disapproval.8
The incident in Tiananmen Square in June 1989 caused a strong congressional
reaction. In 1990, Congress undertook a series of legislative initiatives tying China’s
MFN status with progress in the PRC’s human rights conditions. Several bills
passed the 102nd and 103rd Congress making renewal of China’s MFN status
conditional on progress in human rights. Yet President Bush was opposed to linking
MFN to human rights issues and vetoed the legislation. No legislation withdrawing
or imposing further conditions on China’s MFN status has passed Congress during
the Clinton Administration.9
8Congressional Research Service, Most-Favored-Nation Status and China: History and
Alternative Approaches to Current Law, by (name redacted), CRS Report 96-992, 10
December 1996, p. 1-3.
9Ibid., p. 3, President Clinton announced in 1993 that the U.S. would provide conditions on
renewing China’s MFN status; however, in 1994 the President announced support for its
MFN status without conditions linked to human rights issues.

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Several Chinese policymakers expressed frustration that the United States has
considered linking MFN status to China’s domestic issues. They contended that
China has made great progress since 1989 in providing democratic initiatives to the
Chinese populace. They also contended that the conditional MFN policy “stick” is
no longer effective in trying to make China comply with U.S. ideals. Not renewing
China’s MFN status would seriously impair the current trade relations with the
United States as well as cause significant trade disruptions.10
There was a range of opinion on this issue within the U.S. group. Some
members flatly rejected a policy linking human rights and other democratic ideals to
trade relations with China. They contended that to link human rights issues to trade
policy unfairly imposes an American viewpoint on the current Chinese political
system. America must view China through a prism that reflects China’s culture,
history, and political development—not U.S. ideals and aspirations for the PRC.
Others in the U.S. delegation represented the view that MFN for China should
be opposed based on the continuing structural trade deficit with the United States.
From this point of view, the deficit is not a short-term phenomenon but a longer-term
problem. Before permanent MFN status is bestowed on China, the structural
imbalance of the trade deficit must be addressed. This viewpoint articulated the
concern that once China’s MFN status becomes permanent, there will be no incentive
for China to redress the long-term trade deficit with the United States.
Yet others in the delegation supported MFN status but believe it should be
linked to progress on human rights issues. This viewpoint contended that it is
perfectly within the political and philosophical framework of the United States to
insist that basic conditions of freedom and democracy are in place before a
permanent business and trading relationship is ratified by Congress.. In particular,
there was concern that Chinese dissidents continue to be imprisoned without fair
trials and that free speech and other forms of expression are routinely suppressed.
Advocates of this position in the U.S. group called for the United States and China
to exchange information on political prisoners, and hold leadership summits in
Beijing and Washington to discuss both nations’ humanitarian concerns.
Membership in the WTO. Chinese membership in the WTO also was discussed
at great length by Americans and Chinese on this trip. In 1995, the WTO succeeded
the General Agreement on Tariffs and Trade (GATT) as the major forum for
discussion of global trade issues. Since the inception of the WTO, China has sought
membership, in part to have a forum to voice its trade policy and in part as a sign of
its growing importance and stature in the global community. However, many WTO
countries contend that China’s trade policies are incompatible with the WTO system
of what are accepted as standard and fair trading practices. Critics cite China’s
10Discussions with Ambassador Jiang Chengzong, Chinese People’s Institute of Foreign
Affairs, Beijing, 12 August 1997; Mme. Zhang Yuejiao, Director General, Department of
Treaty and Law, Ministry of Foreign Trade and Economic Cooperation; William C.
McCahill, Jr. Deputy Chief of Mission, Department of State, Beijing, 16 August 1997;
Robert Ludan, Minister-Counsellor, Economic Affairs, Department of State, Beijing, 16
August 1997.

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continued centralized trade practices, a lack of movement towards complete
privatization of enterprises, inadequate protection of intellectual property rights
(IPR), and evidence of continued non-tariff barriers as some of the issues still
unreconciled for Chinese membership in the WTO.11
In response, several Chinese officials contended that it is critical for the global
community to include a major nation like China in the multilateral trading system.
China is the eleventh largest trading nation in the world, and by some measures, the
third largest economy in the world.12 Chinese officials contended that WTO
membership will further open its economy to technology imports, creating a greater
market for high technology firms seeking to do business abroad. Chinese officials
also stated that other nations without open economies or completely free market trade
policies, such as India, Malaysia, and Thailand, are members of the WTO. They
asked: is there a double standard for China?13
MFN status with the United States and China’s WTO membership are important
issues for both China and the United States. The Chinese position consistently
emphasized the importance of resolving both issues in a satisfactory manner.
Members of the U.S. delegation stressed that the U.S. government understands the
importance of both issues to the PRC, and that a stable trading position with the
United States and other global partners is a desired outcome.
Technology and Security. During discussions on trade issues, concerns were
raised about technology transfer between the two nations. Chinese officials
uniformly stated that one way to significantly alter the trade imbalance between the
two nations was to change U.S. export control policy and allow more high
technology components to be sold to China. In particular, Chinese officials stressed
the importance of U.S. high technologies and advanced research and development to
the Chinese economy. Several Chinese government and business leaders called for
greater U.S. exports of telecommunications and computer technologies, aircraft and
aerospace industry components, capital equipment and manufacturing technologies,
and advanced materials and composites. They argued that these technologies would
continue to spur economic growth and lead to greater domestic stability in China, the
region, and globally.14
11George Holliday, China’s Application to the World Trade Organization: Are Chinese
Economic Reforms Sufficient? CRS Report 96-857, p. 2-3.
12Ibid., p. 1.
13Discussions with Ambassador Jiang Chengzong, Chinese People’s Institute of Foreign
Affairs, Beijing, 12 August 1997; Mme. Zhang Yuejiao, Director General, Department of
Treaty and Law, Ministry of Foreign Trade and Economic Cooperation, Beijing, 13 August
1997; and Yang Jiechi, Assistant Foreign Minister, Ministry of Foreign Affairs, Beijing,
14 August 1997.
14Ibid., China’s policy was summarized very concisely by William C. McCahill, Deputy
Chief of Mission, Department of State, Beijing, and Robert Ludan, Minister-Counsellor of
Economic Affairs, Department of State, 16 August 1997.

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Discussions between members of the U.S. delegation and Chinese policymakers
during this trip explored whether there may be increased opportunities for technology
transfer between the two nations. Common ground was found in those areas where
U.S. technological expertise can directly contribute to improving the quality of life
for the Chinese people (e.g., telephone and telecommunications infrastructure). It
was also recognized that there continues to be tension between China’s desire for
U.S. commercial technology transfers and U.S. concerns regarding Chinese use of
dual-use technology for military applications, as well as proliferation of such
technologies to other countries. These tensions appear to have increased since
August 1997.
Technology Transfer and Economic Growth. The importance of technology
transfer to the PRC was raised often by Chinese officials. Technology was cited as
the catalyst by which China would fully develop as a nation. Some American
observers of China believe no long-term relationship is more important to the
Chinese than the relationship with the United States, because of the need for U.S.
technologies leading to China’s advancement. These observers view China as poised
to make an historic political, economic, and social transformation, shedding many
antiquated aspects of an older system as a new society emerges.15
Chinese officials emphasized the importance of technology transfer as part of
China’s self-image among other developed nations. In this respect, U.S. policies that
deny technologies to China were described as an affront to the Chinese people. Some
officials often expressed frustration with U.S. views which they believe “demonize”
or “chastise” Chinese attempts to obtain advanced commercial technologies. Chinese
officials contended that any developing country would seek out the most advanced
and appropriate technology for economic growth. Several officials were of the
opinion that there is a double standard in U.S. policy towards technology transfer to
developing countries, in which other developing nations receive appropriate
technology denied to the Chinese. Some officials appeared perplexed and angered
by U.S. technology transfer policies.16
Export Controls. Chinese officials consistently raised two concerns with U.S.
technology transfer policy. The first was over U.S. export control laws and
regulations. The Chinese position seemed to reflect confusion and irritation over the
direction and intent of U.S. export control policies. They expressed concern that
certain technologies, such as basic memory semiconductor chips, can be exported to
China while more advanced semiconductor chip technologies can be blocked under
U.S. military control lists. Similarly, while U.S. policies restrict certain types of
supercomputer technologies for sale to China, Chinese officials stated that they can
obtain identical technologies from other countries (e.g., France or Japan). Or, the
Chinese can buy “off the shelf” workstations and other commercial technologies
15William C. McCahill, Deputy Chief of Mission, Department of State, Beijing, and Robert
Ludan, Minister-Counsellor of Economic Affairs, Department of State, 16 August 1997.
16Discussions with General Xu Xin. President, China Institute for International Strategic
Studies, Beijing, 13 August 1997; Yang Jiechi, Assistant Foreign Minister, Ministry of
Foreign Affairs, Beijing, 14 August 1997; and Ambassador Jiang Chengzong, Chinese
People’s Institute of Foreign Affairs, Beijing, 12 August 1997.

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from U.S. vendors and “bundle” these technologies for advanced high-performance
computing.17
Many U.S. policymakers and some business leaders also have questioned U.S.
export controls, believing they are antiquated and at cross-purposes. Basic export
control policies were established during the Cold War, when U.S. national security
interests were clearer and well-defined. Some now argue that current export
restrictions toward China may be attempts by some to create a national security
threat for the United States where none may now exist.18 However, numerous
Members of Congress and several private analysts have recently suggested that the
post Cold War deregulation of exports (and particularly the liberalization of export
controls by the Clinton Administration) may be contributing to the strategic
capabilities of potential adversaries. In particular, Congress is currently examining
the implications of U.S. exports to China of dual-use commodities, licensed by the
Department of Commerce. Another issue is the transfer of several items from the
U.S. Munitions List, where they were licensed for export by the Department of State,
to Commerce Department’s Commodity List, the effect of these transfers on export
control decisions, and the national security, nonproliferation, and foreign policy
implications.
Critics in the United States and China also point to conflicting licensing policies
and jurisdictions among the Departments of Commerce, State, and Defense.
According to the General Accounting Office (GAO), the Department of Commerce
can justify the license of commercial technology for export using economic and trade
interests, and it controls items to achieve specific national security and foreign policy
objectives. The Department of State has a broader authority to deny export, and must
take national security interests into account before providing export licenses. The
Department of Defense advises both Departments of Commerce and State on their
license cases and emphasizes military applications of technology transfer. The GAO
contends that differing statutory authority among these three agencies has caused
jurisdictional and procedural uncertainty for U.S. export control policies.19
However, the GAO, upon examining specific technology transfer policies and
actions between the United States and China, also has determined that the Chinese
government’s role—particularly the military—in technology transfer has complicated
this issue. The GAO found that in the transfer of both telecommunications and
machine tool equipment to China, the Chinese military’s role in obtaining and
17This perspective is discussed in: Seymour Goodman, Peter Walcott, and Patrick Homer,
High-performance Computing, National Security Applications and Export Control Policy
at the Close of the 20th Century [Working paper], Department of Commerce, Washington,
4 May 1998, 200 pages..
18Henry A. Kissinger, “No Room for Nostalgia,” Newsweek, 29 June 1998: 50-52.
19General Accounting Office, Export Controls: Change in Licensing Jurisdiction for Two
Sensitive Dual-Use Items, GAO/NSIAD-07-24, January 1997, p. 3-4.

CRS-10
diverting technology from the United States has raised additional questions about the
purpose and objective of China’s technology transfer from the United States.20
Most members of the U.S. delegation acknowledged that more can be done to
streamline U.S. export licensing procedures, clarifying jurisdictional problems
between U.S. agencies, and making procedural decisions more transparent. However,
most believed that serious technology transfer problems between the United States
and China still exist. Some members expressed doubt that the United States would
change its export control policies towards China, unless the PRC first made very
transparent its policies of obtaining and using certain foreign technologies. This was
underscored by the position that until these issues are discussed more openly and
frankly between both countries, changes in U.S. export control policies which might
benefit the PRC are unlikely.
Proliferation. Several Chinese officials protested that the United States has
unfairly and incorrectly portrayed China as an agent of proliferation of military
weapons and nuclear technologies to rogue nations. During every discussion with
Chinese officials, this portrayal was denied. Chinese officials consistently spoke of
a U.S. government report which purportedly cleared China of this portrayal,21 as well
as the absence of proof from the international community at large that China was
supplying Iraq, Iran, Pakistan, or any other country with military weapons or nuclear
technology.22
This claim was countered by official U.S. representatives in Beijing. They stated
that there has been evidence of China’s proliferation activities for several years.
However, U.S. officials indicated that China appeared to be curtailing some of its
proliferation activities to other nations. According to the U.S. view in Beijing, in
1997 Chinese officials recognized that proliferation was a serious impediment to
U.S.-Chinese relations. U.S. officials also commented that when the United States
raises proliferation concerns with Chinese officials, China raises concerns about
weapon sales to Taiwan.23
20General Accounting Office, Export Controls: Sale of Telecommunications Equipment to
China, GAO/NSIAD-97-5, November 1996, p. 4; General Accounting Office, Export
Controls: Sensitive Machine Tool Exports to China, GAO/NSIAD-97-4, November 1996,
p. 1-4.
21It is unclear which U.S. government report the Chinese were referring to. Several officials
mentioned a Central Intelligence Agency (CIA) report; a 1997 CIA report addressing this
issue, covering the last half of 1996, described China as “the most significant supplier” of
goods related to weapons of mass destruction to Pakistan, Syria, and Iran. “China:
Certifiably What?” The Economist, 25 October 1997: 41.
22Discussions with General Xu Xin. President, China Institute for International Strategic
Studies, Beijing, 13 August 1997; Yang Jiechi, Assistant Foreign Minister, Ministry of
Foreign Affairs, Beijing, 14 August 1997; and Ambassador Jiang Chengzong, Chinese
People’s Institute of Foreign Affairs, Beijing, 12 August 1997.
23Discussions with William C. McCahill, Deputy Chief of Mission, Department of State,
Beijing, and Robert Ludan, Minister-Counsellor of Economic Affairs, Department of State,
16 August 1997.

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Proliferation of specific technologies and their uses also was raised during
discussions. During one such meeting, the Chinese position stressed the importance
of the nascent national space program, and how China and the United States could
cooperate in this field.24 Members of the U.S. group asked Chinese officials about
China’s national policies for containment of launch vehicle and related satellite
technologies, and the use of these technologies within national boundaries. The U.S.
delegation was assured that China’s Long March satellite launch program was purely
commercial in nature, and that there was no intent to pass along vital launch and
satellite technologies to other nations that could be used for launching missiles. The
delegation found this Chinese position to be highly suspect.25
National Interests. According to one source, one-third to one-half of all
economic growth comes from technology progress, and that it is the principal driving
force for long-term economic growth and increased standards of living for modern
industrial societies.26 Therefore, it is understandable why China’s national policy for
obtaining and utilizing the best foreign technologies is vital to its goals of economic
growth. However, China’s national interest in obtaining technologies may not be
consistent with those nations that are the source of technology. Those nations often
restrict or control technologies that they view as inimical to their national economic
security.
The importance of technology transfer to national economic security policies
was the focus of an animated discussion during a luncheon at the Boeing
Corporation’s Beijing offices. Officials from Boeing described what it is like to do
business in China, and cited two key elements for undertaking business in the PRC.
The first is that it is never “just business” in China, but that personal and political
relations are key for any foreign firm trying to do business. Boeing officials
acknowledged that meeting certain host country concessions, such as technology
transfer, required a balancing of business interests and objectives. If certain
technology transfer concessions would have to be made to capture Chinese market
share, Boeing likely would consider this as a good long-term tradeoff.27
The second key was to balance Boeing’s corporate global perspective with U.S.
national economic and security interests. For Boeing officials, U.S. export control
policies can hinder the company as it competes against companies from countries
24For background, see: Congressional Research Service, China’s Space Program: A Brief
Overview Including Commercial Launches of U.S.-Built Satellites, by (name redacted), CRS
Report 98-575 23 June 1998,15 pages.
25Discussion with General Xu Xin, President, China Institute for International Strategic
Studies, Beijing, 13 August 1997; proliferation issues were more broadly discussed with
Yang Jiechi, Assistant Foreign Minister, Ministry of Foreign Affairs, Beijing, 14 August
1997; and Ambassador Jiang Chengzong, Chinese People’s Institute of Foreign Affairs,
Beijing, August 1997.
26Ralph Landau and Dale Jorgenson, editors, Technology and Economic Policy. Cambridge,
Mass.: Ballinger Publishing Company, 1986, p. 2.
27Discussions with Timothy B. Premselaar, Vice President of Customer Service, Boeing
China Inc., Beijing, and Jiane Chen, Ph.D., Director of Public Affairs, Boeing Commercial
Airplane Group, Beijing, 14 August 1997.

CRS-12
with less restrictive policies. The Boeing officials cautioned members of the
delegation that, as staff for U.S. policymakers, they should recognize that export
control policies do not just affect the United States domestically, but have a wider
impact outside of U.S. borders, which may significantly affect U.S. business
interests.28
But several members of the U.S. delegation countered that what may be best for
U.S. multinational corporations may not always be best for U.S. national interests.
While recognizing the challenges of doing business in a country like China, they
contended that every country has export controls that would extend to important
commercial technologies and dual-use commodities. Nor, some in the delegation
argued, should the United States encourage technology transfer while serious trade,
employment, and security issues between the two nations have not been resolved.
Xi’an (August 15th - 17th)
The congressional group spent several days in the city of Xi’an in the Shaanxi
province. This part of the trip provided members of the group the opportunity to visit
a high technology center, engage in discussions on current agricultural standards
issues, and visit many cultural and historical sites in the region.
High Technology Center
The U.S. group made a brief visit to the Xi’an High-Technology Center. The
high technology center, formed in 1991, is a complex of buildings that serves many
purposes. Office and research space are rented out to entrepreneurs who are seeking
to develop new innovative ideas or to commercialize scientific inventions. It is also
a site for joint ventures and direct foreign investment. Since 1991, nearly 300 high
technology joint ventures have begun at the Xi’an high technology center.29 Upon
completion of the entire high technology center early in the next century, supporters
of the center expect 2,000 high technology enterprises to be housed in over a dozen
buildings.30
The high technology center is also part of a larger high technology development
plan to establish a high technology zone in the Shaanxi province. According to the
managers of this high technology center, China now has 52 state-level high
technology zones. The Xi’an high technology zone is intended to become the
Chinese high technology version of Silicon Valley or Research Triangle (in North
Carolina). To that end, the provincial government has established strong ties with
local universities and colleges to draw upon students with backgrounds in science,
28Ibid.
29Discussions with Zhang Dongfan, Vice Executive Director, The Administrative Committee
on Xi’an High-Tech Industries Zone, Xi’an, 15 August 1997.
30Ibid. While construction of the high technology center began shortly after its creation in
1991, only approximately one-third of its facilities were completed by August 1997.

CRS-13
engineering, and related technical education. The provincial government also
provides preferential treatment for newly formed firms at the center.31
The Xi’an high technology center appears to have potential in a region where
there has been little high technology development and economic growth. The center
and zone are both intended to attract companies in telecommunications, electronics,
advanced materials and other high growth fields. However, it was unclear whether
any new products or commercial innovations had come out of the Xi’an high
technology center by August 1997. It is also unclear whether this type of state-
directed high technology program will provide the type of innovative and
entrepreneurial technology development and commercialization its leaders have set
as the region’s goal.
Agriculture Exports and Sanitary Standards
The issue of agriculture trade between the United States and China was
discussed several times during this trip. Because the Shaanxi province is a farming
region, Sino-American discussions on this part of the trip often addressed both
opportunities and problems of agricultural trade between the two countries.32
According to the Foreign Agricultural Service (FAS) of the U.S. Department of
Agriculture, China’s large and growing population is driving a greater need for
wheat, coarse grain, corn, and other agricultural goods. Domestic production of
agricultural products, while expanding rapidly, cannot meet the needs of a population
now at 1.2 billion. For example, for corn, production is being used to meet increased
domestic consumption and is not exported.33
China is an important market for U.S. agricultural exports. In 1996, the United
States exported $2.092 billion in agricultural goods to China. (In the same year, the
United States imported $597 million in agricultural goods from China). Through
1997, the United States had a surplus in agricultural trade with China for nine of ten
years. The most important agricultural exports to China are wheat and cotton, which
in 1996 together accounted for 56% of U.S. agricultural exports to China. However,
these export levels for specific commodities can vary greatly from year to year. For
example, the United States exported $1.1 billion in wheat to China in 1989; in 1990,
exports of U.S. wheat to China was $497 million.34
31Ibid.
32Shaanxi is not the largest farming region in China, however. The Shandong province is
a leading producer of wheat and corn, and other provinces with large agricultural interests
include Henan, Hebei, and Sichuan.
33William Brant, Minister-Counselor, Office of Agricultural Affairs, “The Chinese Market
for U.S. Agriculture,” [Overview], Department of Agriculture: Foreign Agricultural Service,
1997.
34Congressional Research Service, The Market in China for U.S. Agricultural Exports, by
(name redacted) and (name redacted), CRS
Report 97-807, 27 August 1997, p. 1-2.

CRS-14
An important part of the U.S.-PRC relationship is a 1992 Memorandum of
Understanding (MOU) that included terms to standardize import-export policies and
to reduce tariff and non-tariff barriers. Part of the MOU included an agreement that
China would use more rigorous scientific measurements for evaluating the sanitary
and phytosanitary standards of imported agricultural commodities. However, the
U.S. Trade Representative has concluded that China’s phytosanitary standards are
“often overly strict, unevenly applied, and not backed by modern laboratory
techniques.”35
China’s use of sanitary and phytosanitary standards36 to restrict U.S. imports,
particularly that of wheat, was discussed. Some Chinese and Americans expressed
a belief that China and the United States can find a common ground in their bilateral
agricultural policy. Some members of the U.S. delegation, especially those from rural
states, stressed the importance of increasing U.S. agricultural exports to China as a
way of improving relations between the two nations. China continues to indicate that
it is receptive to increasing its agricultural trade with the United States, but has linked
that action with obtaining MFN status with the United States, and eventual
membership into the WTO.37
Political and Cultural History
The visit to Xi’an included several visits to museums, ancient burial grounds,
temples, and other historical sites. It provided members of the delegation an
opportunity to better understand the political and cultural history of China, and to
better comprehend the enormous size, scope, and diversity of the nation.
One of the most important cultural and historical lessons learned during this part
of the trip was that China’s long history has been marked by periods of unity and
disunity, in which imperialism and autocracy brought together disparate groups
interspersed by periods of separatism and provincial discord. For some Chinese
policymakers and foreign Sinologists, this history provides a cautionary note that
political, cultural, and ethnic ties which appear to unite China today may be more
tenuous than viewed from the outside.38
35Office of the U.S. Trade Representative, 1998 National Trade Estimates Report, p. 50.
36Sanitary (human and animal health) and phytosanitary (plant health) measures are laws,
decrees, standards, regulations, guidelines, and procedures that protect human, animal, or
plant life and health primarily from risks arising from additives, contaminants, toxins, pests,
or diseases in foods, animals, or plants. See: Congressional Research Service, Sanitary and
Phytosanitary Safety Standards for Foods in the GATT Uruguay Round Accords, by (name
redacted), CRS Report 94-512, 21 June 1994, 30 pages.
37William Brant, Minister-Counselor, Office of Agricultural Affairs, “The Chinese Market
for U.S. Agriculture,” [Overview], Department of Agriculture, Foreign Agricultural Service,
1997. The problem of differing U.S. and Chinese sanitary and phytosanitary policies also
was discussed by William C. McCahill, Jr. Deputy Chief of Mission. Department of State,
Beijing, 16 August 1997.
38Emily MacFarquhar, “Back to the Future in China,” U.S. News and World Report, 12
March 1990, p. 40-48.

CRS-15
The city of Xi’an figures prominently in the earliest history of what is now
China.39 It was Qin Shi Huang Di (259-210 B.C.) who established the first unified
imperial dynasty in China at Xi’an and ordered the creation of 6,000 life-sized terra
cotta soldiers. Xi’an served as China’s capital over 11 dynasties, from the Qin
Dynasty and its successor, the Han Dynasty (206 B.C.-A.D. 220), to the Tang
Dynasty (618-907).40
The region around Xi’an also become the crossroads for the development of
several religious and philosophical tenets during the era of “The Hundred Schools of
Thought” (approximately 400-200 B.C.). Among the first of the philosophies
developed was Confucianism, a philosophy adapted by a scholars who sought to
create a social and political ideal unifying the Chinese people. This system
prescribed a series of orderly relationships within a society (“Let the ruler be a ruler
and the subject a subject”) based on ethical relationships and moral good.41
Chinese Legalism, also known as the School of Law, was diametrically opposed
to Confucian thought, and vied for followers during this period. It was a philosophy
based on authoritarian control of government, not ethical or moral persuasion.
Legalists exalted the state and sought prosperity and marital prowess above the
welfare of the common people. During the Han Dynasty, the tenets of Confucianism
and Legalism were combined to create a working imperial form of government. The
tension inherent in these two philosophies of the “Rule of Man” versus the “Rule of
Law” approach to government is still evident in modern China.42
Shanghai (August 18th - 21st)
Shanghai is one of the most rapidly growing cities in China, with a 1997
population of 14.7 million, the fifth largest in the world.43 It was the first Chinese
city opened to western trade (1842), and at the beginning of the 20th century became
China’s largest industrial center. Although closed off from western interaction after
1949, it retained its lead as China’s center for industrial, scientific, and technological
development for nearly fifty years. Since normalization of relations with most of the
West since the late 1970s, issues involving Shanghai’s development are technology
and capital formation, the role of state-owned-enterprises (SOEs) and multinational
enterprises (MNEs), and telecommunications and Internet development.44
39Library of Congress, Federal Research Division, China: A Country Study, by Robert L.
Worden, Andrea Matles Savada, and Robert E. Dolan, editors, July 1987, p. 5.
40J.D. Brown, “Chinese City in Transition,” The New York Times, 14 March 1994.
41Library of Congress, Federal Research Division, China: A Country Study, by Robert L.
Worden, Andrea Matles Savada, and Robert E. Dolan, editors, July 1987, p.7-10..
42Ibid.
43Its population by 2015 is expected to be 23.4 million.
44The World Almanac and Book of Facts, World Almanac Books, 1997, p. 838, and The
New Encyclopaedia Britannica,v. 27, 1997, p. 284-288.

CRS-16
Technology and Capital Formation
Shanghai has three major districts: central Shanghai, which consists of the oldest
part of the city; the large agricultural areas of the rural hinterlands forming the edge
of the metropolitan area; and the transitional zones in between the two. The Pudong
district is one such transitional zone, and is home to a science and technology park
as well as several public and private research and development centers.
The Shanghai (Z.J.) Hi-Tech Park was created in 1992 as the first step of a
larger “technopolis” encompassing most of the Pudang district of Shanghai. As with
its counterpart in Xi’an, the Shanghai (Z.J.) Hi-Tech Park, when completed, will be
impressive in size and scope. It will cover 17 square kilometers and employ over
10,000 scientists, engineers and researchers.45 The main purpose of the park is to
encourage foreign investment and joint ventures in research and development (R&D).
A preferential tax policy for foreign firms locating in this park was outlined by
officials at the park. This includes tax moratoria and holidays for long-term R&D
investment by foreign firms.46
While the official emphasis at Shanghai (Z.J.) Hi-Tech Park is to encourage
domestic and foreign private sector investment, it was clear that American and
Chinese interpretations of how to implement this policy differed. Chinese officials
at the park were asked by members of the U.S. delegation what could be done to
further encourage U.S. high technology firms to consider Shanghai (Z.J.) Hi-Tech
Park for R&D joint ventures. The Chinese officials responded that the U.S.
government should lead companies to Shanghai, and it should be U.S. public policy
to interest U.S. firms in relocating to the park. Even when members of the delegation
explained that this is not an appropriate role for government in the American context,
the Chinese position remained unchanged.47
The issue of attracting foreign investment for technology development also was
central to discussions with representatives of the U.S. insurance firm American
International Group/American International Assurance Co., Ltd. (AIG/AIA).
Representatives from this company stated how difficult it is to sell insurance and
other forms of financial instruments in Shanghai and the rest of China. They
contended that many Chinese still have a strong suspicion of foreign financial
companies, and that life and property insurance are new concepts for most Chinese.
For many Chinese, the risk/reward for investment resides only with savings accounts
in Chinese banks that pay very low interest rates. Representatives from AIG/AIA
indicated that further industrialization and technology development and
commercialization may be hindered if Chinese capital is not invested more
constructively.48
45Investment Guide, Shanghai (J.Z.) Hi-Tech Park, [English version] 1997, 19 pages.
46Discussions with Honglian Hu, Vice President, Z.J. Hi-Tech Park, and Shirley Zhao, Sales
and Marketing, Z.J. Hi-Tech Park Development, Shanghai, 19 August 1997.
47Ibid.
48Of course, their view of “more constructive” capital investments would be through their
(continued...)

CRS-17
One source of investment capital for technology development and
commercialization may be the Shanghai Stock Exchange. Created in 1990 with just
eight companies publicly traded, the Shanghai Stock Exchange had 628 members by
August 1997, with over half of those firms issuing two forms of stock.49 However,
it was unclear from discussions how much of the investment in the Shanghai
Exchange was used for capital investment in Shanghai as opposed to being secondary
market transactions among buyers and sellers. When asked about this, Chinese
officials contended that while there will always be some speculative money, most of
the investment was sound. As proof, they indicated that as of August 1997 neither
the Shanghai Exchange nor China as a whole was affected by the economic downturn
which had begun in Indonesia, Korea, and Japan.50
SOEs and MNEs
State-owned-enterprises (SOEs) are those companies started, managed, and
supported by the Chinese government. Multinational enterprises (MNEs) are mostly
foreign firms, independent of government control, that have established production,
sales, and/or R&D in China. In Shanghai, the congressional staff delegation met
representatives from General Motors (GM) and Nike Sports Company, Ltd., two U.S.
MNEs. The delegation found:
! At GM China Inc., there is a complex relationship between GM, the central
government in Beijing, the Shanghai provincial government, Chinese
suppliers, several Chinese SOE auto manufacturers, and other foreign auto
firms competing in China. For GM, having to work with so many disparate
interests was inefficient and uneconomical. To address this problem, GM
provides 50% funding for the Shanghai Automotive Industry Group (SAIG),
a joint venture automobile manufacturing facility with the Shanghai provincial
government. This provides GM with a single Chinese-affiliated entity with
which to do business.51
! Nike’s Shanghai branch office represents the company’s sales and marketing
interests in China. This operation began in 1984, and every year since, Nike
48(...continued)
company’s investment instruments. Discussions with Bethy Wu, Assistant Manager, Human
Resources Department, AIG/AIA; Jacob N.K. Wong, Deputy General Manager,
Administration, AIG/AIA; Daniel C. Zhou, Accident and Health Manager, AIG/AIA,
Shanghai, 19 August 1997.
49These are “A” shares, which are primary shares in a company, and “B” shares, which are
somewhat like convertible stock in the United States. Discussions with Dr. Hio Rio Yin,
Vice Director, Development and Research Centre, Shanghai Stock Exchange and Li Qian,
Director of Public Relations, President’s Office, Shanghai Stock Exchange, Shanghai, 20
August 1997.
50Ibid.
51Discussions with John Wilson, Attorney, General Motors Overseas Corporation; William
J. Barclay, Executive Director of Finance, GM China Inc., Shanghai Automotive
Operations, and Sherrie Childers, Manager, Public affairs, GM China Inc., Shanghai
Automotive Operations, Shanghai, 19 August 1997.

CRS-18
has lost money, including $9 million in 1996. However, company
representatives stated that Nike is committed to long-term business growth in
the PRC. The biggest problem facing this U.S. company is protection of
intellectual property rights against piracy, and what they described as the
PRC’s bureaucratic and often corrupt distribution system for their goods.52
In Shanghai, as elsewhere on this trip, there were indications that China is going
through a difficult era of privatization as it tries to reduce or eliminate its SOEs.
However, if the Chinese government removes all support for these firms, most will
not be able to compete. The potential for large scale unemployment if workers from
Chinese SOEs cannot find work elsewhere is a major concern for China. As of
August 1997, there already was some indication of worker displacement and massive
shifts of population as China tries to address issues of privatization and free
enterprise.53
Telecommunications and the Internet
Shanghai also was representative of the great growth in telecommunications
infrastructure, applications, and services in China. There was evidence in central
Shanghai and Pudong of long lines of fiber optic cable, new satellite dishes on
buildings, and construction of terrestrial communications relay towers. The Shanghai
Stock Exchange had just recently been completely rewired for global trading.
In the rest of China, there has been an explosion of telecommunications
technologies and applications. This has been most evident in the growth of the
Internet in China. In 1993, only about 20,000 Chinese had access to the Internet. By
the time of the delegation’s trip, that figure was about 250,000. In 1998, it is over
600,000. Chinese officials forecast that the number of Internet users in China will
be two million by 2000, and seven million by 2001.54
One of the impacts of this growth in Internet use is its effect on the global
economy. From discussions with U.S. business representatives in Shanghai,
education and training of Chinese students in computer science and related fields
represents one of the most popular areas of academic study.55 These students are just
beginning to enter the workforce. One expert describes many of the new information
technology and service workers as “virtual aliens.” Instead of making high-level
professional wages as they would in the United States, these information technology
52Discussions with Harry Johnson, General Manager, Nike Sports Company Ltd., Shanghai
Branch Office; Frank Chen, Marketing Director, Nike Sports Company Ltd; and Martha
Benson, Director of Communications/Asia Pacific, Nike International Ltd., Shanghai, 20
August 1997.
53Discussions with Yang Guoqiang, Deputy Director-General, Foreign Affairs Office,
Shanghai Municipality, Shanghai, 19 August 1997.
54“China and the Internet,” Reuters, http://www.nuia.ie/surveys/index.cgi?service.
55Discussions with Bethy Wu, Assistant Manager, Human Resources Department,
AIG/AIA.; Jacob N.K. Wong, Deputy General Manager, Administration, AIG/AIA; Daniel
C. Zhou, Accident and Health Manager, AIG/AIA, Shanghai, 19 August 1997.

CRS-19
workers are employed by U.S. companies at a much lower wage than comparable
U.S. workers. They have been characterized as “virtually” U.S. employees for a U.S.
company; “fully networked and employed as members of the U.S. economy, they
don’t pay U.S. taxes and may never even have visited the United States.”56
But the Internet does not yet represent a total communications revolution in
China. In a country of 1.2 billion people, 0.4% of households reportedly have
personal computers.57 Most Chinese citizens are unlikely to have access to
computers and global communications networks well into the next century. Even
telephones, while becoming more common, reach about 6% of the population.58 It
also is unclear whether China’s official policies toward Internet use and
communications will permit this growth or have to change because of it. In 1996, a
law was passed requiring all Chinese who use the Internet to register with Beijing.
China’s official policy on the Internet continues to restrict its access and use by
ordinary citizens.
Hong Kong (August 22nd and 23rd)
The last part of the trip consisted of one full day of meetings in Hong Kong.
Discussions focused mainly on the impact of the turnover of Hong Kong from British
to Chinese rule. Other points of discussion included political freedom and territorial
sovereignty.
Hong Kong After July 1, 1997
At midnight, June 30, 1997 Hong Kong reverted to Chinese sovereignty, after
150 years of British rule. The transfer of power was the result of a 1984 Sino-British
Joint Declaration which established a “one country, two systems” principle of
transfer. The PRC has pledged to leave in place Hong Kong’s open capitalist system
for at least fifty more years.
On the surface, little seemed to have changed in Hong Kong in the nearly sixty
days between the transfer and the delegation’s visit. Hong Kong has a population of
5.5 million, with a population density per square mile of 15,158.59 It gave the
appearance of continuing to be a thriving mercantile center and there was no civil
disruption or interference with activities after the turnover. Most of the discussions
56Dan Tapscott, The Digital Economy: Promise and Peril in the Age of Networked
Intelligence, New York: McGraw-Hill, 1997, p. 5.
57In the United States, it is 40%. Mark Landler, “Hong Kong Tycoon Seeks Internet
Success, The New York Times, 13 April 1998, http://www.nytimes.com.
58Karl Gude and Silvio da Silva, “China by the Numbers: Portrait of a Nation,” Newsweek,
29 June 1998, p. 24. In the United States, about 94% of the population has direct access to
telephones.
59In the United States, population per square mile is 75; in the rest of the PRC, it is 327,
Anna Kuchment, “For Richer or Poorer. . .” Newsweek, 19 May 1997, p. 40.

CRS-20
we had with both Hong Kong natives and American business leaders expressed
continued confidence in Hong Kong’s growth and prosperity. 60
Political Freedom61
Many leaders in Hong Kong acknowledged that a very important question will
be answered over the next several years: can the Hong Kong which they have known
survive as a part of China? While economic conditions are somewhat guaranteed,
can the same be said for political freedom and protection of individual rights?62
Interestingly, for many long-time residents of Hong Kong, democratic ideals of
political freedom and protection of individual rights have come somewhat late in
Hong Kong’s history. Many natives of Hong Kong were disenfranchised during most
of the British rule, and Chinese resentment over foreign rule was strong even at the
time of the turnover. Still, some would argue that real power in Hong Kong resides
in the marketplace, and not in legislative bodies.63
As of August 1997, most Hong Kong observers with whom we met said that
they expected a smooth transition as the Provisional Legislative Council (“Legco”),
appointed on July 1, 1997, by Beijing, is replaced by one elected more directly
(elections were scheduled for May 28, 1998). Elections for Legco only began to be
held in 1985, with the first wholly-elected Legco not occurring until 1995. These
elections were based on a “20-30-10” formula of geographic representation (direct
elections), functional representation (with elected slots determined by occupation and
position in society), and by an appointed election committee.64
60One interesting note occurred during a talk with the head of Hong Kong’s Futures
Commodities Exchange. He was asked what he thought of the possible speculative nature
of global financial markets, and with forty years of experience in finance and investing,
what would be his advice to U.S. stock investors. His reply: “Get out (of the U.S. stock
market) now.” Discussion with Ivers Riley, Chief Executive Officer, Hong Kong Futures
Exchange Ltd., Hong Kong, 22 August 1997. [The S&P 500 has increased 25% since that
time.]
61The group did not meet with Martin Lee or with any of the members of the Pro-Democracy
movement.
62Discussions in individual meetings with Dr. Patrick Leung, Chairman, Vision 2047
Foundation, Hong Kong; Arthur NG Sek-hon, Deputy Secretary for Constitutional Affairs,
Hong Kong; and Nellie K.M. Fong, Chairwoman, Executive Committee, Better Hong Kong
Foundation, 22 August 1997.
63Discussions in individual meetings with Arthur NG Sek-hon, Deputy Secretary for
Constitutional Affairs, Hong Kong, and Mr. Richard Margolis, First Vice President, Equity,
Merrill Lynch, Member, Vision 2047 Foundation, 22 August 1997.
64British officials hoped this 1995 Legco could serve through the 1997 transition — a
concept called “through train.” But the Chinese government dissolved the 1995 Legco
shortly after the turnover and crafted new electoral rules for elections to be held in 1998.
However, the new rules still allow for the “20-30-10" formula. See: Congressional
Research Service, Hong Kong’s “Provisional Legislature Controversy” by (name
redacted), CRS Report 97-557, 10 pages.

CRS-21
Several Hong Kong legal experts contended that among the many implications
of this change in electoral representation Hong Kong’s “Rule of Law” will influence
or supplant the “Rule of Man” tradition in China. They stated that despite British
occupancy—or perhaps because of it—Hong Kong has enjoyed a very clear and
concrete legal system. Therefore, China, with its history of autocratic rule in Beijing
and interests of provincial party officials, has had a history of “Rule of Man,” in
which the mandate of an individual or the party may supersede legalisms.65

The answer of which system will emerge as Hong Kong is assimilated into
China is still unknown. U.S. officials generally viewed the developments post-July
1, 1997 with optimism tinged with realism. Some Hong Kong officials contended
that difficult issues, such as protection of foreign intellectual property rights (patents,
copyrights, and trademarks), abused in both Hong Kong and China, may be resolved
under a unified “Rule of Law.” Yet, some in Hong Kong stated that, conversely,
freedom of the press and free speech may be curtailed if a Beijing “Rule of Man” is
extended to Hong Kong. Chinese and American observers commented that even a
third scenario, which involves a compromise of both the “Rule of Law” and “Rule
of Man,” may create a peaceful, if uneasy, coexistence, between Hong Kong and the
rest of China.66
Territorial Sovereignty67
Many residents and observers in Hong Kong which the delegation met with
expressed great confidence (although mixed with some concern) that Hong Kong will
essentially retain its unique character. In several meetings, the issue was not whether
China will influence, and therefore change, Hong Kong; but how much Hong Kong’s
unique mix of economic, trade, political, and democratic characteristics may change
China.
The future of Hong Kong also involves larger issues of Chinese territorial
sovereignty in the Asia Pacific region. Hong Kong has served as a gateway for much
of China, and therefore can be seen as an aperture through which technology, trade,
and security issues flow. As part of an experiment in “one country, two systems,” the
Chinese appear anxious to demonstrate that it can successfully and peacefully
complete Hong Kong’s transition. Still, it was also very clear that many Chinese now
view Hong Kong as a domestic issue, and no longer subject to outside interference.
For many Chinese officials, if Hong Kong can be successfully adopted into
China’s national political and economic system, then the next goal would be to look
65Discussions with Daniel R. Fung, Solicitor General, Department of Justice, Hong Kong,
22 August 1997, See also: Bruce Einhorn, “Hong Kong: Now the Rule of Law is in
Jeopardy,” BusinessWeek, 20 April 1998.
66Discussions in individual meetings with Richard Boucher, Counsel General. American
Counsulate General, Hong Kong, and Professor Ng Ching Fai, Provisional Legislative
Councilor, Hong Kong, and Dr. Wong King Keung, Former Preparatory Committee
Member, Hong Kong, 21 August 1997.
67The following issues, while described as part of the Hong Kong turnover, were also a part
of almost every discussion during the two weeks the delegation was in China.

CRS-22
towards Taiwan and apply the “one country, two systems” policy there as well. To
some, Taiwan’s absorption into China is inevitable, and would have already occurred
without an American presence. U.S. technology, trade, and security policies toward
Taiwan are an irritant to the Chinese. They contend that U.S. support of Taiwan
interferes with China’s domestic policy of reunification. The U.S. delegation
generally pressed for greater dialogue (and change) in U.S.-PRC technology, trade,
and security policies; many Chinese officials in turn addressed U.S. policy towards
Taiwan as the major obstacle for improving relations.68
Epilogue: Developments Since August 1997
U.S.-Chinese relations since August 1997 appear to follow the old Chinese
proverb (both a blessing and a curse): “May you live in interesting times.” A variety
of technology, trade, and security, as well as other economic and political issues,
remain at the forefront of the U.S.-PRC relationship. The following developments
are among the highlights of this changing relationship.
In September 1997, the Chinese People’s Congress met to elect party officials
and to set national policies for the next year. President Jiang Zemin was expected by
some to emerge from the congress much weaker in power and with his economic
reform policies greatly diluted. However, according to some observers, Jiang was
able to handle internal party factions and avoided open confrontation from both hard-
line conservatives and liberal reformers.69
During the fall of 1997, the “Asian contagion” of falling currency valuations in
Indonesia and Thailand spread to Korea and affected other nations like Japan and
China as well. In China, the economic downturn came at a time when official
Chinese policy encouraged the privatization or dismantling of many SOEs considered
to be inefficient or inoperative. The impact on unemployment was fairly severe,
causing disruptions in the workforce. As currencies in several nations were
devalued, many U.S. multinational corporations reported that their earnings, some
based in large part on overseas sales, would be adversely affected.70
In October, President Jiang Zemin visited the United States to meet with
President Clinton. President Jiang signed an order for the Chinese government to
buy fifty Boeing aircraft for $3 billion. Presidents Jiang and Clinton also agreed that
in exchange for China’s promise to limit nuclear trade with rogue states, the United
States would lift a U.S. ban of non-military nuclear technology. President Clinton
described it as a “win, win, win” situation for U.S. technology, trade, and security
68Another territorial issue was Tibet, which came up infrequently during discussions. Most
Chinese officials we met consider Tibet to be a purely internal matter. The U.S. delegation
did not raise it often, and when the issue of hegemony over Tibet was raised, most Chinese
had very little to say about the situation.
69“Out of the Shadow of Deng,” The Economist, 20 September 1997: 39-40.
70“Will the World Slump?” The Economist, 15 November 1997: 15; 19-21; 77; and “A
Lorry-Load of Trouble in Asia,” The Economist, 6 December 1997: 65-66.

CRS-23
objectives; critics contended that there was no enforcement in the agreement for
China to honor its commitments.71
In December, in Kyoto Japan, a United Nations summit on global climate
change focused attention on what could be done to reduce emissions of so-called
“greenhouse gasses” that are thought to be warming global climate. The Kyoto
Protocol was considered controversial because it failed to set commitments for
developing countries — including China — to reduce greenhouse gas emissions that
other signatories would have to meet. These commitments had been requested by
President Clinton and by the U.S. Senate in S.Res. 98 (approved 95-0 on July 25,
1997).72
Also in December, elections were held in Hong Kong. China reported that the
voting was direct and open, resulting in the election of 36 deputies to sit in the
National People’s Congress. However, others contended that most of the elected
deputies were Beijing party faithful, selected by a small core of 424 “qualified”
delegates in Hong Kong.73 Elsewhere, Chinese territorial policies continued to raise
western concerns. Tensions between China and Taiwan were heightened after
Taiwan reaffirmed its independent status. In the far western province of Xinjiang,
over a million troops were dispatched to quell a separatist movement.
For the first quarter of 1998, the Department of Commerce reported that the
U.S. trade deficit with China was about $11.5 billion. This represents an increase of
19% over the first quarter of 1997. At this rate, the U.S. 1998 trade deficit with
China would exceed 1997, and could possibly pass the trade deficit the United States
currently has with Japan. However, the United States continues to run a surplus in
agricultural trade with China, with preliminary figures indicating that most
agricultural trade with China is ahead of 1997 trade.74
In 1998, proliferation in the Asian region became a global concern. In May,
India conducted five nuclear tests and Pakistan responded by detonating nuclear
devices of its own. The nuclear tests increased tensions between two nations that
have fought three wars in the last fifty years. In announcing his country’s successful
nuclear test, Pakastani President Sharif publicly thanked China for making its nuclear
technology available. 75
71“Jian Zemin’s Visit: Trick or Treat?” The Economist, 1 November 1997: 26-27.
72Given these developments, there is little prospect at present that the Senate will give its
advice and consent to ratification; consequently, the Administration is not expected to send
the protocol to the Senate in 1998. Congressional Research Service, Global Climate Change,
(name redacted) and John R. Justus, IB89005 [updated regularly].
73“Rotten Boroughs,” The Economist, 13 December 1997.
74Department of Commerce, Bureau of the Census, The World Trade Atlas, (Provided by
(name redacted), Congressional Refere nce Division Library of Congress).
75Michael Hirsh and John Barry, “Nuclear Jitters,” Newsweek, 8 June 1998: 22-27 and
“Asia’s Shockwaves,” The Economist, 16 May 1998: 15-16. See also: Congressional
Research Service, India-Pakistan Nuclear Tests and U.S. Response, by (name redacted),
(continued...)

CRS-24
Tensions between the United States and China over technology transfer also
extended to several commercial and dual-use technologies. A series of news stories
and government reports in the spring of 1998 indicated that several U.S. firms may
have improperly or illegally shared technology and information with Chinese
scientists and engineers. The 105th Congress began a series of hearings on U.S.
export control policies and possible Chinese violations of U.S. national security laws
in obtaining satellite, machine tool, and supercomputer technologies.76
Against this backdrop, President Clinton visited China in late June 1998. The
President visited Xi’an, Beijing, Shanghai, and Hong Kong during his two week visit.
Addressing issues of political freedom and freedom of speech, he condemned the
Tiananmen Square incident of 1989 and called for more democratic reforms in
China. He also vowed to improve trade and other economic ties between the United
States and China. President Clinton expressed support of China’s “one nation, two
systems” approach while in Hong Kong and stated that the United States would not
support Taiwan’s independence. In turn, the Chinese government announced that
it would agree to a framework agreement to better control the unauthorized use of
technology exported from the United States to China.
75(...continued)
(name redacted), Jonathan Medalia, and Dianne Rennack.
76Congressional Research Service, Space Launch Vehicles: Government Requirements and
Commercial Competition, by (name redacted), IB93062 [updated regularly]; (name redacted),
China: Possible Missile Technology Transfers from U.S. Satellite Export
Policy—Background and Chronology, CRS Report 98-485, 20 May 1998, 20 pages; and
(name redacted),
China’s Economic Conditions, IB98014 [updated regularly].

CRS-25
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Dr. Patrick Leung. Chairman. Vision 2047 Foundation. Hong Kong. August 22,
1997.

CRS-26
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Jacob N.K. Wong. Deputy General Manager. Administration. AIG/AIA. Shanghai.
August 19, 1997.

CRS-27
Dr. Wong King Keung. Former Preparatory Committee Member. Hong Kong.
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(name redacted), (name redacted),
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India-Pakistan Nuclear Tests and U.S. Response. CRS Report 98-570. June 18,
1998.
(name redacted).
Trade Statistics of the United States: Merchandise Trade,
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(name redacted). Hong Kong’s 1998 Electoral Reforms. CRS Report 97-822.
September 8, 1997.
(name redacted). China’s Treatment of Religious Practices. CRS Report 97-882.
Updated September 25, 1997.

CRS-28
(name redacted). Hong Kong’s “Provisional Legislature” Controversy. CRS
Report 97-557. May 21, 1997.
(name redacted) and Patricia Nugent. China-U.S. Relations: Chronology of
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22, 1997.
(name redacted). Telecom Services: The WTO Agreement. CRS Report 98-165.
February 26, 1998.
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China’s Economic Future, 2010 and 2020. CRS Report 97-246.
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(name redacted) a nd Peter Mitchener. China: Interest Groups and Recent U.S.
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CRS-29
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