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China Task Force Briefing [Rush Transcript; Federal News Service]

Speakers: Carla A. Hills, Chairman/CEO, Carla Hills & Company, and Dennis C. Blair, Task Force Chair, Former Pacific Command Commander In Chief
May 14, 2007
Council on Foreign Relations

LEE FEINSTEIN:  (In progress) -- to say this meeting is on the record. 

Well, writing a report by committee is a difficult task under any circumstances.  Writing a report by committee that has clear findings and recommendations is a taller order still.  And add to that poor acoustics, and the lack of information and misinformation which attends the U.S.-China relationship, and you have something close to mission impossible.  Unless, of course, you're at the Council on Foreign Relations and have the opportunity to turn to a former U.S. trade negotiator, and one of America's most decorated military officers -- Carla Hills and Dennis Blair.

Carla and Dennis have combined to produce, with some very heavy lifting and a lot of patience, a platinum report, "U.S.-China Relations:  An Affirmative Agenda, A Responsible Course."  And it is a report that is analytically strong, and it has a very clear point of view.  And as impressively, it also garnered the support of a very diverse range of prominent Americans on the subject.  And I encourage you to take a look at what the list is, and you'll see that while these individuals were cherry-picked for their expertise and position, they were not cherry-picked because they would all necessarily come to agreement.  They genuinely represent the range of views on the U.S.-China relationship in the United States.

You have the bios of Carla and Dennis here.  I will not go into great detail, except to say that Carla is chairman and chief executive officer of Hills & Company.  She was, as I said earlier, the U.S. trade representative from 1989 to 1993.  She's chair of the National Committee on U.S.-China Relations; vice chair of the Inter-American Dialogue; member of the executive committee of the Peterson Institute for International Economics and of the Trilateral Commission.  She is also vice chair of the board of the Council on Foreign Relations.  Oh, and by the way, to boot, she was the secretary of the Department of Housing and Urban Development earlier. 

Also serving as co-chair is Dennis Blair, who holds the Omar Bradley Chair of Strategic Leadership at the Army War College and Dickinson College for 2007 and 2008.  He was president and CEO of the Institute for Defense Analyses, which is a prominent federally funded research center outside Washington, D.C.  He was in the Navy for 34 years serving as commander in chief of the U.S. Pacific Command, and also as commander of the Kitty Hawk Battle Group.

It has been a genuine honor to serve in a supporting role of these two individuals.

And our format for today is as follows:  Carla and Dennis will make some opening remarks that will summarize the key points, findings and recommendations of the report, then we'll open the floor to your questions.

Begin with Carla.

CARLA HILLS:  Thank you, Lee.  And thank you for all your work you've done on this report.  Lee was directing this and was very, very helpful. 

The report covers the economic, trade, governance, military and security issues.  And I'm going to talk about the economic, trade; allude to the governance issues, and my counterpart is going to talk about military and security.

Briefly put, we thought that a policy of engagement, which both Republicans and Democrats had followed over a number of years, has worked; that China has lifted 400 million people out of poverty, and that it has joined a number of international organizations, and it has adhered more and more to international norms.

Having said that, there's tremendous unease in this country.  A number of people are concerned about our prosperity, believing that China puts it in jeopardy with its rapid growth and low wages; that our influence is being eroded by China's outreach to various regimes around the world; that our security is being jeopardized by its rapid military build-up.  And we're uncomfortable with China's unwillingness to follow our human rights norms. 

And at the same time, China is uncomfortable about us.  The Chinese worry that our military, by being in the region, is meant to encircle it; that our outreach to Central Asia is to cut them off from resources they need to continue to grow; that our dwelling on human rights is to foment a so-called Orange Revolution. 

And so there needs to be a bridge.

Our task force came to the conclusion that we would be better off bilaterally if we could have a tripartite policy that sought to continue to engage China, engage on all of the issues candidly, that we would continue to integrate her into the international community; and so that we could use those international organizations more frequently when we had a disagreement, and it would cause China to observe or adopt the international norms.  And we thought that by maintaining our strength we would provide balance, strength in the economy, keep our own economy going, and strength with our military.

We were aware, as the Chinese leadership has identified, that China faces really enormous challenges.  Environmentally, it's highly polluted, and I won't go into the details; it's in the report.  But it is 16 of the world's most polluted cities -- 16 of the 20 most polluted cities are in China.  It has an aging population, so it has a demographic challenge.  It has poverty; 400 million people still live in poverty.  And it has a middle class that is increasing, but increasing in its demands -- clamoring for better housing, better schooling, better pensions.  It has volatile ethnic and religious groups, and it has endemic corruption.  Their assessment, not mine.

And we thought that, as a result, China is interested in maintaining stability and growth.  Growth gives its government legitimacy, and that's what it's promised its people.  So it wants a zone of peace around its perimeter.  It wants to keep a good relationship with the United States, and it wants access to those resources that are necessary for continued economic growth.  And we believe that under those circumstances we would be better off, as a policy matter, to talk to the Chinese candidly about their issues and our issue; to take our tripartite policy of engagement, integration and balance and to deal with them much, much more regularly on the issues that are confronting us.

So our recommendation, you'll see in the book, is that the president speak often and clearly to the Chinese that the Americans want to have a close, candid, collaborative and cooperative relationship with China.  That is a policy we want; and that the president ought to explain to the American people clearly that we benefit economically from a good relationship with China.  There's studies out that show that the average American households will be a thousand dollars better off by the year 2010, by reason of our trade and economic interplay with China; that we ought to explain to the American people that our interests are advanced if we have a prosperous China.

We don't want China to implode.  To the contrary, we want a prosperous China that fuels global growth.  We want a secure China that wants to deal with issues like the environment and doesn't feel distracted or under pressure.  And we want a China that is cooperating with us and dealing with the international issues of the day, whether it be energy, environment, pandemics, piracy, you name it.  We can't solve it unless China and we are working together.

So basically that was our recommendation, is that we sit down and talk about the issues.  I will leave the issues for you to ask me about.  I -- we have a number of them where we recited in the report things that we thought we each could do.  But suffice it to say, that we wanted to have more frequent bilateral talks under the umbrella of a policy; that we want a close, candid, cooperative, collaborative relationship with China.

FEINSTEIN:  Thank you, Carla.


DENNIS BLAIR:  Yeah, on the security side, the characterization we used for our recommendations came from Bob Scalapino, and he said that we should add a concert of power dimension to the balance of power concept, which has really dominated Asian security politics.

If you look at the diplomatic side of that and the military side, there are sort of two pieces of security that we know.  On the diplomatic side, China has certainly been following a policy of peaceful development in recent years, settling border disputes with neighbors, emphasizing trade relations, joining international organizations that we noted in that report.

We think this is a very, very conscious decision by China to keep the external environment quiet as they concentrate on the big social and economic challenges which they feel most keenly, and we feel that that is a good policy.  And from the American point of view -- we need to reintensify our focus on China.  It's been distracted somewhat because of the oppressive current events in the Middle East.  And as we refocus, we should not only intensify our interaction with Asia -- there have been new multilateral fora that have developed in recent years; we should join them -- as we deal bilaterally with both allies in the region and with other countries, we should widen that policy to include China, most specifically, we should work towards attempting to turn around Chinese-Japanese tensions, which are very strong in the region.

As we develop our relationship with India, it should not be in a way that attempts to exclude or to take sides against China, but it should be in a way -- we should have the Chinese dialogue element to our relationship with India.

So our diplomatic strategy should be more inclusive on the American side and on the Chinese side.  It should adopt a role which Secretary Zoellick articulated as a responsible stakeholder, which means that you don't just do things that are in your narrow, unilateral interest; you do things that are better for the entire system, because ultimately, you benefit from the system.

On the military side, we noted China's military -- its growth in power, which has been occurring for about the last decade or so.  Its results has not only been greater resources put in but more power developed.  We saw that as primarily pointed towards a coercive capability against Taiwan and a robust defense capability for China's own sovereignty.  We felt that the United States needs to maintain the era of maritime and space superiority that it has enjoyed in the Western Pacific for the last 50 years.  It's really been the basis for a lot of Asian economic development, including that of China.

But it could go beyond that to deal with China in a whole range of areas in which our interests run in the same direction, everything from simple cooperation on humanitarian search and rescue response to response to tsunamis and earthquakes and the things that seem to strike that part of Asia up through peacekeeping operations in which China has shown more participation recently by both dialogue, exchange of functional experts and exercises and working on common exercises that we could build habits of cooperation, which would be important for both countries over the long term for the (military leadership ?) of Taiwan, which really lies between China's (straits ?) in a major way.  We believe that the foundations from the American side are correct in terms of a Taiwan relations act, and we should follow those closely.

So we think the security future between the United States and China can be a positive one, if the United States has this wider view sharing power, bringing China into the multilateral system on issues of (common concern ?) and from the Chinese side, growing responsibly as they become more powerful as they are economically and with the related military power.  So that's how we took it from the security end.

FEINSTEIN:  Thank you, Dennis and Carla, both.  We'll now open to the floor to your questions.  I'd just ask you, for those of us whose eyesight is limited and may not know you personally, just to introduce yourself and state your affiliation.  Also, anybody who still has their BlackBerries on, try to -- if you can manage it, turn it off for just a few minutes, because it's creating some static in the sound system.

Yes, sir.

QUESTIONER:  Oh, yeah.  This -- (name inaudible) -- from China.  First, I just want to ask a very basic question.


QUESTIONER:  It's about the timing and the necessity of your report.  You know, it seems the Bush administration has only less than two years to ago, and we don't know who will be the next president yet.  Why do you think now is necessary to have such a -- you know, overall review of U.S.-China relations?  That's number one.

Number two, your -- you know, your book is called, you know, "Affirmative Agenda."  What does really this mean?  Is there any difference between the engagement policy?

HILLS:  Well, the timing of our report, we think, is fortuitous.  Because the assessment of our 30-person task forces was that the level of understanding and information in this country about China was deficient.  And we felt in particular that the elected representatives in our Congress were underinformed with respect to China, underinformed with respect to basic facts. 

So you'll find the report contains a lot of basic facts about China.  What are the challenges facing the leadership?  What is the data that supports those challenges?  What has been the history of our two countries in the past?  So we hope that it is issued at a time when it can be helpful.  That's the basic timing. 

And the -- what does it mean to have an affirmative agenda?  That means that we would like to have a positive outcome on bilateral issues.  And we believe one of our bilateral issues is to have a peaceful, expanding global economy.  So we're two players, but we're two large players on the international stage.  Sometimes the two of us can do better in solving problems; sometimes it will take a broader group and a responsible course. 

That is our -- those are our recommendations: to talk to the American people about the benefits that flow from a constructive relationship with China, and to talk to the Chinese leadership candidly about the issues that genuinely cause us grave consternation, and the areas where we could work together, and to tell them how we can work together but have the capacity to listen to how they think we can work better in finding solutions.  So I hope that answers your question. 

QUESTIONER:  Nick Kristof from the New York Times.  One question for each of you if I can. 

For Carla Hills, how much do you worry that a presidential election campaign is actually going to lead to the opposite kinds of pressures, to, you know, an irresponsible course if you will? 

And for Admiral Blair, if you look back at the Hainan spy plane incident and the management of that, are there systems in place now that give you confidence that if that were to happen again, we would be able to communicate better with the Chinese side, to be able to manage that kind of an incident better than we did back then? 

(Cross talk.) 

BLAIR:  It's interesting.  I went back to China in 2003 for sort of a retrospective on the EP-3 incident, trying to get at that same question that you had, that you just asked.  And I think that most of the problems were not so much the communication between the two sides as -- (inaudible) -- decisions under crisis conditions within China itself. 

There was a lot of bad information circulating around in China.  There was uncertainty as to roles, who did what.  The communications channel was between the Chinese ministry of foreign affairs and the U.S. Embassy, and that was pretty clean.  It's just that there's often no response coming from the Chinese side. 

I would say it's an indication of the way things often go in Chinese relations, and that I don't really know on the outside whether the procedures have improved that much within China or not.  I think there still is a tendency for lower echelons to report information in a misleading way up the line, which from the people at higher levels to mistrust what information is they're getting; a lot more communication being required before a policy can be formed.  And then -- so a tendency often to form foreign policies based on instinct and first reactions rather than on clear analysis of a situation. 

So I think overall probably procedures have improved within the Chinese government.  But I'm not sure that we could be quite as effective, should another crisis come up, as we'd like to be.

HILLS:  I interpret your question about the presidential campaign as being that no president will take on this issue because of the political implications.

MR.     :  And also that candidates will raise the issue aggressively in a way that will exacerbate public opinion. 

HILLS:  Every president in recent memory in the first two years has had a rather rocky relationship with China.  I think what this report tries to do is to get some facts out to minimize that being repeated. 

It is true that on many issues, trade issues for example, there are candidates who will beat up on trade rather than to try to find a solution to a problem.  You have to ask yourself, when someone wants to run for high office, whether it be the president, a senator or a congressman, do they go into a meeting hall and take a poll and then reiterate what the people in that meeting hall want to hear, or do they talk from their conscience and their understanding and their education and try to lead?  Are they going to be a follower or a leader?  And hopefully, the more effort we make before that campaign, so the facts are on the record -- and you all have a part to play in that -- the better off we are, because I do think that the American people are underinformed with respect to what are the facts in China, and what are the benefits of a U.S.-China relationship, and what would be the detriments of an implosion in China.  And you go out on the street and you ask people, and while the polls show that Americans like Chinese -- and by the way, the polls show that the Chinese like Americans -- the answers to those three questions is very, very mixed. 

So I think that what we're trying to do is educate and inform, and we'll have, we hope, a splendid presidential campaign.  (Laughter.)

FEINSTEIN:  Yes, ma'am?

QUESTIONER:  (Name inaudible) -- Central News Agency, Taiwan.  Among the 30 members, which area you have more dissenting views?  For instance Taiwan or any issues.

BLAIR:  I'm sorry, could you ask that again, please?  I just didn't quite hear.

QUESTIONER:  Which area you have more dissenting views among the --

HILLS:  In the task force?


FEINSTEIN:  Yes, what was the hardest to reach agreement on.

QUESTIONER:  Different views.

BLAIR:  Well, I think one area that -- in the security area that we spent a lot of time discussing was this concept which is sometimes called hedging in other reports.  You find that we do not use that term.  But the idea that you make your policy with some negative and some positive aspects because you don't know where the future will lead.  We came out on the side that we should not have just a disinterested policy towards an important issue like China, but that we should work for a positive outcome.  The danger of hedging that is some things that are based on a country you're dealing with becoming aggressive and some things that are based on a positive outcome is that the same thing is happening in the other country and you can sort have a mutually reinforcing negative spiral which neither side intended. 

So we took the tack in the security area, and in other areas, that we should have an affirmative agenda, be working towards common interests, which we think are very strong in the case of both countries.  But we did say that there are great uncertainties in the development of this relationship, and so there are certain things that the United States has to do simply in order to take account of potential uncertainties.  Almost all of those things that we talked about are things that we feel that the United States should be doing anyhow.  To keep our global competitiveness, we need to improve our education system.

The fact that half of -- or I think between a third and a half of those who enter our high schools don't graduate from high schools in this age in which we're going to need every educated citizen and worker we can get is something we have to fix.  Certainly, in the diplomatic area, having strong relationships with countries in Asia is something we should do, whether China was there or not.

So many of these things that we recommend that the United States do are really sort of basic important actions that this country needs to take in order to go into the future in any case, and then on the basis of them, we can have some very specific positive initiatives with China that we think will be in the purpose of both countries.


QUESTIONER:  I'm Suzie McFadden (sp) from ABC News.  I have just returned from a two-week reporting trip to China and have many questions, but let me try to focus them.

First, how far away are we right now from a positive engagement, what you would consider positive engagement with China?  I understand the desire to get there, but how far are we away from it?

And secondly, I understand that many things happen -- need to happen simultaneously, but what would you set as the priority at this point?  I understand you don't want to have to make the choice between security or trade.  I understand that many things need to go on simultaneously, but if you were king or queen, where would we begin?

And finally, pollution and the environmental crisis in China is at crisis pitch.  Reports are that the U.S. will be passed by China in a war -- race that none of us want to win, as the lead CO2 emitter, either later this year or early 2008.

So if you would address those three issues, I'd be grateful.

BLAIR:  The three p's -- position, the priorities and the pollution.

QUESTIONER:  You should work in parliament.  (Laughs, laughter.)

BLAIR:  Well, good policy is on a spectrum, and what you want to do is to encourage leaders on both sides to move in a positive direction.  It's hard to say where, you know, two years from because we have many, many issues -- economic, trade, security, governance issues with China.  They're lagging most, in our view, on the governance issues, and -- in our view, in our assessment -- and indeed the leadership.  Wen Jaibao has talked in terms of having to have a safety valve, more -- moving more towards democratic principles.

So how close are we on economics?  I think we have great convergence on the economic issues.  I don't think there are a number of economic challenges that can be solved without China and the United States working together.  You mentioned one, the environment, but pandemics, the -- energy, piracy.  There are -- North Korea.  I mean, I could go on and on.  And the priorities are -- I don't think you can draw a very sharp line between economic and trade issues and foreign policy.

The thing that brings most nations to the table is to have a positive outcome that's in their national interest.  And you think on all the issues, but usually it is an economic issue.  They want to do better for their nation.  But if you can start to sit at the table on the economic and trade issues, you can talk about the issues that are causing those to not work out very well.

In our case, we've got criticism among our congressional leaders, and if we could fix that, it would help move on some of these other issues.  If we could move together on some of the issues that I enumerated, probably our foreign policy would be enhanced too, and there'll be some economic things that we have to do as we deal with third parties that we need to agree on, that'll have an affect upon our own economic well-being.

So they're connected, and I think that we would want to move in -- down a spectrum where we have more positive outcomes across the economic, trade, governance, security and military, and each will feed into a greater opportunity for success in the other areas.

BLAIR:  You know, it's interesting.  There's sort of a theory that's going around in the China-watching community about a perfect storm coming up with the 2008 Olympics, a U.S. election and a Taiwanese election, some sort of mutually reinforcing explosion and crisis.

I think what's really interesting is that the opinion of most of that -- of us is that's a very low-probability event, and in fact most of the developments in the security area are going on to the more -- on to the --against a crisis, in a less tense way.

So I would think security concerns, which were relatively high a number of years ago, have sort of receded.  And to me, the issues which are most urgent have to do with the trade and commercial relationships -- IPR, currency, jobs -- and that those are the ones that we really need to move forward on in a positive way in order for the whole relationship to move forward positively.  I'm frankly more concerned about those personally than I am about the issues where I used to spend my -- most of my time worrying when I was on active duty.


QUESTIONER:  Michael Elliott from Time.  You make these recommendations of increased engagement and at a time when, as you note in the report, there is little movement towards reform in Chinese internal governance structures and indeed, where, you could argue -- though, you know, I think you could argue the case either way -- that over the last few years, there's been, to an extent, increased repression in China, rather than not.

Is there a point, though, when Chinese internal governance structures became so authoritarian and so repressive that you would not recommend the policy of engagement and deepening integration that you recommend in this report?

HILLS:  I would quarrel with your premise there that there has been little movement toward reform.  I first went to China in 1980, and then at that time you needed to have permission to -- as to what job you would take --

QUESTIONER:  I was really thinking of the last couple of years, actually.  I --

HILLS:  Even then, I think that the -- for example, there's been a recognition of poverty in the rural areas, particularly in the west.  And therefore there has been tax alleviation.  There have been lectures to provincial leaders on changes.  There have been campaigns to eliminate corruption that have stolen from the people. 

What there hasn't been is an American-style democracy.  There is a recognition that the government must be more responsive, but they've having a hard time with this, and it is lagging.

But the courts are better today than they were five years ago.  I think China in a governance sense is better since it joined the World Trade Organization in 2001.  And we find that when nations join a trade regime like that, that not only do you increase economic opportunity multilaterally but you increase transparency, rule of law and respect for property.  China's not there yet, but it is more there than it was a half-decade ago.

But I don't have a crystal ball.  I can't look over the horizon and see who the next generation of leadership will be.  We don't even know their names.  And so you could have a very repressive regime come in if there were an implosion in China.  An implosion in China would have some very negative effects globally.  It would certainly affect the United States.  Certainly the global economy would feel that an implosion in China was -- made the Asia crisis of '97 look like a little tide, whereas in China it would be something that probably was historic in terms of size.

And whether in reaction to that some brutal dictatorship could come in and be worse than even the Cultural Revolution or the Great Leap Forward, I don't know.  We would have to gear our policies to the circumstances at the time. 

We don't want that to happen, and that's why we've made these recommendations.  And we believe it's less likely to happen if China is -- if we engage with China and let her know what are our keen points that we really care about and how we can accommodate together where we have a commonality of view and integrate her into international organizations, so that they can assist in helping change China's ways.  I'd much rather talk to China in Geneva at the Human Rights Convention than have us be the solitary voice.  And I'd rather, when they sign a convention, that we point to that signature rather than to harangue them on our values.  And so I think there's a lot between -- that we can continue to do from 2007 on that will make the horrific picture that is not impossible less likely.

BLAIR:  Let me just add a couple -- I think there are -- this was a big discussion in the task force, and I think there are two aspects of it that are important.  Number one, we in the task force felt that we do believe in the fundamental values of human rights and representative government and civil society, and we think that the United States should live up to its own ideals and that those ideals are really on the side of -- that history is on the side of those sort of ideals and that they are, so we can proceed from a confident point of view over the long term.

There's another aspect to it, I think, that applies to China which is a much more practical aspect, and that is that the institutions of such a society -- free press, strong judiciary, rights of individuals -- are also extremely important for an efficient economy in the world of the future in dealing with corruption, in handling complex economic societies.  And for many of those problems bedeviling China and the things it wants to do -- develop its economy, its society -- these are impediments.  And a free press, strong independent courts and the rights of individual citizens will help them attain their goals.

The problem right now is that the Chinese leaders don't believe it. They think that if they make those sorts of changes in the short term too fast, it will lead to a sort of instability, the Communist Party itself being challenged, and you know the play of the scenario.  So they say not now, it takes time; I mean, as Ambassador Hills says, Wen Jiabao's speech at the recent party event.

So we think that in fact, both because it's right and because China, in order to attain the ideals that even the Communist Party does talk about, is going to have to move in that direction, and fully recognizing the sort of repression of the Internet.  And you'll find it all written in the report.  The toleration of individual dissent but strong repression against political dissent are very much recognized, but we think the way forward has to eventually be a greater degree of political and individual freedom in China and that there are many practical things that we can do in order to get there which we think will be both in China's interest in the long term and certainly in the interest of the world.

FEINSTEIN:  Scott's been waiting.

QUESTIONER:  Scott Mountain (sp) from New York Times.  You were talking about the Internet and freedom, and one of the recommendations in the report was that the U.S. should lead a multilateral effort to establish a code of conduct for operating the Internet.  Did you see any enthusiasm either in the U.S. or in China for the U.S. leading something like that?  I mean, it's a good idea, but I'm just wondering what your basis is for thinking it might have a future.

BLAIR:  We've seen a couple of -- I mean, like most things in the Internet, most of the good things that are starting, and the bad things, are being done by small groups of individuals who can tie together in numbers and with an effectiveness that we just hadn't known before.  And I can't remember the name of it right now, but a consortium of several universities which is monitoring both the actual tools that are being used to censor content on the Internet and the ability to circumvent it are the sorts of efforts that we think should be favored.  And again, our recommendations are pretty -- they're not just for what departments in government should do but what American citizens and universities and all should do.  And we're all in favor of those.

And we think all those techniques that can enable people to talk to each other despite government attempts to censor their conduct, content in whatever country should be favored and should go.  So on the internet side I think we were more pushing the private efforts of smart and young users who want to be able to say what they want to say and hook up with others who have the same mind. 

HILLS:  We pointed out in the report that the government is trying to censor, but the technology is getting ahead of it, and that's inevitable.  And so frankly a lot of change that has occurred in China because of its openness, that the NGOs and the business community have come in and made demands or brought their values and wouldn't tolerate limitations for very long.  So if you can get our interests on freedom and openness, for example, on the internet to converge with China's interest to keep investment coming in and be moving up the value chain toward more entrepreneurialship in areas that require -- I mean, after all, living in the knowledge age they're going to need an open internet.  I think that we have a good chance of getting them to sit down and talk about, what are the limitations? 

You know, it's not just China.  We have quarrels in this country of, you know, whether we can ban gambling on the internet, and it goes to the WTO.  I think it's a good thing to have the discussion.  I think it's a good thing to go to the WTO, because you're out of the law of the jungle and you're into a regime that can help resolve the controversy. 

QUESTIONER:  (Name and affiliation inaudible.) 

How could or should the U.S. try to convince China or persuade China to increase the value of the yuan without using, you know, the threats of terrorists? 

HILLS:  For China -- for the United States to persuade China on the value of the United Nations? 


QUESTIONER:  No, yuan. 

HILLS:  Oh, the yuan, I'm so sorry. 

There is another issue where our recommendation is that we talk to China.  Clearly the yuan is undervalued.  The question is, how do we move toward greater parity of our currencies?  East Asia's currencies are also undervalued.  The won and the yen are badly undervalued as well. 

The report talks in terms of a more collaborative effort that would bring the East Asian governments, with perhaps the governments that make up the West, the euro and the dollar, to sit down and talk about a mechanism of rebalancing.  You recall, in '85 we had the Plaza Accord.  We didn't come to that in this report.  But we did talk in terms of the fact that simply to browbeat China to permit appreciation of its currency could have some adverse, unintended consequences in the U.S. economy.  It would raise interest rates, could fuel inflation. 

And a -- if it was not done collaboratively or wisely, you could have some worries in China.  Food prices could go up and adversely affect the rural population, creating instability.  The urban population could lose exports and create greater unemployment. 

So it's in both of our interests.  This is a perfect issue of a convergence of interests.  We both want to have better balance.  Because what we're -- the way we're working today -- economists will tell us -- is not sustainable.  So if it can't -- if it's not sustainable, it won't be sustained.  And so we ought to get on with trying to talk wisely about, what is the corrective path? 

QUESTIONER:  You're confident that the situation -- I mean, that the Chinese government is going to change its position regarding the reissue. 

HILLS:  It already has.  Last year its currency appreciated six percent.  I think it will appreciate more this year.  But you know, if you have a lot of IPO investment flowing into China in anticipation of appreciation, you have a vicious circle or a cycle that can't be worked. 

So it requires -- a solution to a complex issue requires a thoughtful response.  And to have our Congress slap a 27 percent tax on Chinese goods is not a thoughtful response.  Furthermore it would have no effect on either our trade deficit or the currency, because most of what we buy from China is the production of other Asian nations in China -- 65 percent.  So it would have a very small effect. 

But the currencies are not healthy the way they're aligned today.  But I do think that you've got to get Korea, Japan, China, the United States and the euro to work out a means of -- one first step would be to have us cut our deficit and to have China stimulate consumption.  And there are some very good things that China could do to stimulate internal consumption. 

QUESTIONER:  Carla Hills, you said that the --

FEINSTEIN:  Please just identify yourself and tell us where you work. 

QUESTIONER:  (Name and affiliation inaudible.) 

You said that the ignorance caused hostility.  What the task report was trying to do is to get the facts out.  What is your sense that the lawmakers and policymakers in this country are reading the report?  And how can you make sure that they are getting the message that you are trying to get out? 

HILLS:  I'm not their schoolmarm.  (Laughter.)  We can put out a report; we can have people like you write about the merits of reading the report.  And we can give press briefings as we are doing here.  But we can't ensure that there's going to be a energetic, active student body on Capitol Hill. 

We do know that there are some congressmen who care.  Congressman Larsen and Congressman -- the one from Illinois --

BLAIR:  Oh, Kirk. 

HILLS:   -- Kirk went to China together, one Democrat and one Republican, and came back.  And I think it was -- if it wasn't their first trip, it was one of their few trips.  They didn't know each other. 

A couple of very good things happened.  They bonded.  They came back and they formed a study group that was bipartisan, and they continued to meet on a regular basis to talk about the facts.  And they're the first to say that their colleagues are underinformed.  Thus, to the extent that we can do their homework for them and gather some basic facts that affect policy outcome, I think we're doing something of a service, and so we'll keep plugging at it.

BLAIR:  I think the other thing -- you know, if this report had been titled "U.S.-China Relations: A Radical Agenda, An Irresponsible Course" -- (laughter) --

HILLS:  There you go.

BLAIR:  -- we would have -- this room would have been filled with your colleagues to wait for what Admiral Blair and Ambassador Hills said about to enflame that.  And so I think you would find that that is a very sort of centrist approach which we think needs to be reinforced in this country.  And because the way you get headlines, the way you sort of get short-term gains is by either beating up on China on the one hand or on the other hand, you say, let's just time let go by and China will do what it will do.  And we were consciously trying -- and most of the members of the task force agreed that a very radical solution one way or the other is not in the interests of the United States or of China or of East Asia.

So I think one of our objectives here is to try to support those who want to have a solid, broad-based, moderate force that can be supported.  And I for one have received pretty solid feedback from my friends who still serve in the government that has provided them with a basis for moving forward.  It might have helped them against some of the really radical but often either downright dangerous or impractical suggestions that the China-U.S. relationship seems to attract in a way that other relationships don't.

QUESTIONER:  Jonathan Tepperman from Newsweek International.  I'm curious how much you focus on the energy and energy resources in the report.  The reason that I ask is it strikes me that this is one area where China and the United States have very similar interests as net consumers, and yet until now have been acting as though they don't have similar interests.  And if you talk to 10 economists or energy experts, all 10 will tell you that China's -- its mercantilist policy of going up and trying to lock down exclusive oil deals around the world doesn't make sense, and yet the Chinese don't seem to see it that way.  Do you think that this is one area where the United States and China could be brought into closer alignment or --

HILLS:  Absolutely.  It's right up there at the top, where there are gains for both sides, and we do talk about energy in this report.

QUESTIONER:  And do you think that the -- to put it frankly, do you think that the Chinese are open to being convinced on this issue?

HILLS:  The Chinese are worried about having access to resources, so I think talking about how we assure better reliability of resources is a topic that they're interested in.

In many instances, whether it be security or economic, our interests are the same, but the elements of our interests are rearranged in a different order.  And -- but that's a good place to start, because we can better understand each other.  We're the two largest consumers of energy.  China's energy use is extremely inefficient.  It uses nine times more per output than Japan does.  And so we could help provide technologies to improve that, plus their environment, which is another issue that we should be discussing.  And so I applaud the Strategic Economic Dialogue, bringing groups together.  Too often, our governments don't exactly match in structure.  They don't have a secretary of Energy; we do.  So who does Secretary Bodman talk with?  And, you know, he either is below his protocol standing or he's reaching up.  And the question is, how do we get these issues so we are at a table that makes sense?  And we hope -- we know that Secretary Paulson, who is leading the Strategic Economic Dialogue, has seen this book and has said nice things about it.

FEINSTEIN:  We have time for one or two more questions.  Yes, sir, yep.

QUESTIONER:  Professor Lieberthal, University of Chicago, once mentioned that there is still deep distrust in the Washington policymaking circles toward the Chinese government.  Do you have the same feeling?  Do you think that can be changed?  How can we change that?

BLAIR:  I'm sorry.  Could you repeat the question?  You said Professor who?

HILLS:  Yeah, I didn't hear.

FEINSTEIN:  Ken Lieberthal?

QUESTIONER:  Lieberthal.

HILLS:  Ken Lieberthal?

QUESTIONER:  Yeah, Professor Lieberthal.

BLAIR:  University of Michigan.

QUESTIONER:  Yeah, University of Michigan, yes. 

BLAIR:  And what about him?

QUESTIONER:  He mentioned that there is still the distrust.

BLAIR:  Distrust?

QUESTIONER:  Yes, in Washington.  The policy-making people, they still have quite deep distrust in Washington to China.  So do you have the same feeling or you don't have that?

FEINSTEIN:  Are there any others who want to sneak in a question before we wrap up?

HILLS:  Let me just say one thing.  I know Ken Lieberthal.  He served in the NSC in the Clinton administration.  Although we are of different parties, I have never heard him say such a statement, and it sounds so foreign to his writings, that you ought to go back and look at your premise.

QUESTIONER:  Any good dialogue requires two sides.  And I was interested in flipping to the end of the recommendations in the environmental section where you say, "The United States cannot expect China to participate in global efforts to combat climate change if the U.S. government does not itself fully and unequivocally accept the link between human activity and global warming and join with other nations to seek multilateral solutions."

So this isn't just about our expectations, the committee's expectations about China, but also about U.S. behavior.

HILLS:  Right.  That is laced through the report.

QUESTIONER:  So, no one ever likes to do this, but if you were going to give the current administration a grade for where we are at this moment in time in our relationship with China --

HILLS:  I personally think we have a lot of work to do.  But that's why we wrote the report.  We're not casting blame on either side.  We're saying this is a new policy -- draw a line and move forward.  Let's enhance the relationship, let's have a candid -- you tell us what you think, we'll tell you what we think; close, collaborative, cooperative relationship.  Let's meet more often, not just infrequently.  And let's build a relationship that we on this side of the Pacific want, that is to be a warm and constructive relationship with China.  And it's going to take some work.  We're going to have --

QUESTIONER:  And the consequences of not doing that -- pardon me for interrupting -- the consequences of not doing that?

HILLS:  The consequences are spelled out.  And I think that if we have an antagonistic relationship with China, our prospects as a nation are less fine.  And it behooves us to find a way to lead.  And of course there are things we can do.  We have things on the trade side we should do, the economic side, and the environmental side.

FEINSTEIN:  Dennis, are you dispensing any grades before we wrap up?

BLAIR:  Yeah.  I would give this administration a good grade on relations with China.  I think that from the time that the administration came in, there have been high-level contacts done from the very early stage.  The sorts of crises that have come up, the one I personally dealt with was the EP-3 crisis, which was something that, of course, neither side meant to happen.  But it did not derail the overall progress of the relationship.  And now we're meeting at the Cabinet level on very high-level questions, and we're still talking. 

So I think -- and that sort of answers an earlier question.  The reason that we felt an affirmative agenda is needed is because the overall relationship went through -- has gone through a stage that's had some -- a lot of pressures on it recently, and we just wanted to give it a push in the overall vector that it had before, and we think that can be done in a more realistic manner with having surmounted some of these individual shocks.  And we wanted to keep it going in that direction which we think is good.

FEINSTEIN:  Well, I want to thank the co-chairs for giving us an hour of their time to talk in depth about these issues.  And I want to thank all of you for an excellent set of questions.

HILLS:  Thank you.

BLAIR:  Thank you.








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