This lecture was held at The Heritage Foundation on June 22,1998.

If I thought the politics here at home surrounding China and the U.S.-China relationship were complex in late 1992, when President George Bush sent me to China, I was mistaken. That mission had two purposes: to normalize business relations and to remove one of the sanctions the United States had placed on China following the unfortunate happenings at Tiananmen Square in June 1989--the ban on contact at the ministerial level. The political debates of that time pale in comparison with the controversy and confusion surrounding China now.

We are gathered here today on the eve of some important events: President Bill Clinton's trip to China, the annual congressional debate about China's most favored nation (MFN) trading status, the investigations into charges that national security was jeopardized by the transfer of satellite technology to China, and that China meddled in our election process in 1996.

It is difficult to know where to start to sort out the variety of issues and differing interpretations of what is happening. I will begin by taking a look at what is going on inside China today--specifically, the reform process, the key issues that are being hotly debated here, the future of the U.S.-China relationship, and why renewing MFN is more crucial than usual.

A Look at China Today

First, a quick summary of some things most of us know about this country. China is the world's most populous country, with 1.2 billion people. It is the fastest-growing large economy in the world, with an average annual gross domestic product (GDP) growth rate of nearly 10 percent over the past two decades. Now the third-largest economy in the world, China is well on its way toward becoming the world's largest economy in the next decade or two even if its growth rate slows. China is strategically positioned in Asia. It is a nuclear power, holds one of the seven permanent seats on the United Nations Security Council, and views itself as an emerging great power.

In 1978, after nearly 30 years of adhering to communist central planning doctrine, Deng Xiaoping initiated the reforms that are transforming China into a market-oriented economy and a more open society. Progress during the past 20 years has been nothing short of phenomenal: Per capita GDP has quadrupled; 200 million people have been lifted out of poverty; change is touching all regions; and the Chinese people are getting a taste of prosperity and they want more of it. Beijing's ruling elite--as well as provincial and local leaders--must continue to deliver or lose legitimacy and, ultimately, lose power. As things stand now, the central government is not all-powerful and may never be again. Provinces and locales are expanding, growing, and exercising more clout. China is not a monolith.

The leadership of the central government still devolves through the Communist Party, but the leaders are communists more in name than in fact. They are on a clear road to capitalism; some say that, in reality, they are "authoritarian capitalists." The increased openness that accompanies economic reforms is allowing many new ideas and ways of doing things to percolate in China. I believe these new experiences and exposure one day will add up to more political freedom.

A key event occurred in March 1998 when changes in the leadership were ratified, as expected, by the National People's Congress. The most important change is that Zhu Rongji became the new Premier, second only to President Jiang Zemin. Earlier, as Executive Vice Premier and financial czar, Zhu Rongji led the austerity drive to cap inflation--and it worked. He is a reformer who seems to understand free-market economies, is not afraid to make tough decisions and take risks, and has a human side that he allows to show. He seems to have the respect--and even the affection--of his colleagues as well as the person in the street. Zhu has promoted other like-minded reformers; and with every such move, the reform trend in China becomes more irreversible.

In March, the National People's Congress also ratified a reform package--the toughest one yet. I was in China six weeks ago and had the opportunity to sense first-hand how the leadership was approaching these reforms. A key part of that program is to reform the inefficient state-owned enterprises, some 300,000 of them, in three years. That is a very ambitious timetable, but this reform must be done if China is to become a true market economy. The downside risk is a high rate of unemployment. The numbers of unemployed are in the millions now, and there is concern about the "floating population"--some 80 million to 100 million workers who have migrated from the provinces to fill jobs in the booming cities. There already have been demonstrations in some places. All of this could add up to social unrest.

Reforming the banking sector is also high on the list of priorities. China's banks are technically insolvent because of bad loans to state-owned enterprises. Although there has been an infusion of capital, the banks still have a lot to learn about risk-based lending. There is the need for transparency and a cogent regulatory apparatus to clean up the corruption endemic in the many other banking sectors throughout Asia.

Reforming government--cutting the civil service in half and cutting the army by 500,000--is another drastic move.

The urban housing market will be freed up as of July 1. Residents will have the opportunity to buy flats using their own savings, which are believed to be substantial.

Fiscal and taxation reform is also on the docket. So is the creation of a social security system to provide a safety net, as state-owned enterprises withdraw from doing so.

Pushing all these reforms simultaneously is a huge task, a task now exacerbated by the economic problems of the region. However, I came away thinking that the leadership knows where it wants to go and is willing to be bold in pursuing these reforms. Yet there is realism about the risks. Counting on an upswing in domestic consumption to counter the ill effects, the leadership cites a public works program as well as the added demand for construction and furnishings that will be generated by the newly liberated housing market.

Asia's problems are just now beginning to show plainly in China. Export growth, which was 10 percent to 12 percent in the first quarter, began to slow in April, as did industrial production. And as the yen has continued to sink, the probability of a further decline in the region has increased. Last week's U.S. intervention to support the yen will be helpful, but it is only a small first step. There is much more Japan must do to get its economy going again. China, however, has behaved responsibly so far by not devaluing its currency and sticking steadfastly to that pledge. It is helpful in this case that China's currency is not convertible, its banks are not extended all over the region, and it has $140 billion of foreign exchange reserves. Yet we cannot predict what will happen next year if the downward pressure in the region continues. Will China be forced to devalue its currency? Will it move to close markets as a way to protect itself? We hope not, on both counts.

Finally, we should note that China continues its interaction with and outreach to many other countries around the world. The leadership's foreign policy moves can be summed up as both a reflection of China's national interest, as they see it, and the desire of an emerging great power to be recognized as such.

The Issues Today, Here in the United States

Many of the issues being debated here about China are not new. Human rights, for one, has been an issue for years. We still have vivid memories of the forcible crushing of the democracy movement at Tiananmen Square on June 3 and 4, 1989. We continue to be troubled by some of the things China is accused of doing--jailing dissidents, being intolerant of religion, using forced labor, mandating abortions, coercing Tibet, and the like.

Nuclear proliferation is another key issue. A body of opinion in the United States considers China to be a proliferator, having contributed to the building of nuclear capabilities in Pakistan and Iran. China has given assurances that it is observing the obligations under the Treaty on Non-Proliferation of Nuclear Weapons , but there are those here who do not trust such assurances. Some go so far as to label China a "rogue state."

The trading relationship between China and the United States causes friction. The mounting trade deficit--last year about $50 billion--is a concern. The deficit for this year is running well ahead of last year's. We believe China should truly open her markets and protect intellectual property. Market access has been one of the sticking points in the up-and-down negotiations about China's accession to the World Trade Organization (WTO). U.S. companies have $40 billion of contracted investment in China, investment that needs the protection of a rule of law.

Concern about China's intentions toward Taiwan is still on our radar screen. We wonder whether China would use force to bring this "renegade province," as it sees Taiwan, back into the fold. We have a legal obligation to Taiwan under the Taiwan Relations Act of 1979, which we take seriously. That, in turn, worries China, which seems to want constant reassurance that we will adhere to our "one China" policy. Some in the United States also fear China eventually will change Hong Kong for the worse.

And then there are the worries about whether China's military has expansionist plans within the region or beyond.

But the most explosive issue now revolves around whether two U.S. companies transferred satellite technology to China that could be used to improve the guidance system on missiles pointed at the United States; whether U.S. national security was thereby jeopardized; whether China conspired to interfere in our electoral process in 1996 through illegal donations; whether there was any connection between donations by China or U.S. companies and the Clinton Administration's decision to approve China's launching of a U.S. satellite.

This all is extremely complicated; right now, we have no definitive answers. A Department of Justice investigation is ongoing and congressional investigations--one in the House and one in the Senate--will soon begin. We should not jump to conclusions but wait until we have the final results of these investigations.

But it becomes more clear as the political debate continues that there are very different ways of viewing the same set of circumstances. Those differences are worthy of illumination.

• One is our view of "communism." We would all agree that communism is bad. One school of thought sees it as mostly dead, defeated, and discredited. But there are those who believe otherwise. They think that because China's leaders still call themselves "communists," they are cut from the same cloth as Joseph Stalin, the evil despot of the old Soviet Union. That reasoning leads to the inescapable conclusion that "Communist China" must be inherently bad and is the enemy of the United States and all we stand for. The fallacy is that the "Communist Party" in China has turned capitalist; it is freeing up China's markets and dismantling the old centrally planned economy. This is the anti- thesis of communist doctrine. China is transforming itself from within. By contrast, the old Soviet Union decayed from within and then disintegrated in the aftermath of President Ronald Reagan's uncompromising stance against the "evil empire." There is another difference between the Soviet Union and China: China is not intent on world domination.

China today is still an authoritarian regime, however, one that is hostile to political opposition. But it is far more open both inside and to the outside world than the Soviet Union ever was and not nearly as centrally controlled. Earlier I alluded to cracks in the authoritarian structure. There are two causes: (1) the increased openness of the society; and (2) the elections for local leaders, which have been taking place in nearly one million villages. These elections may not be perfect by our standards, and China's leadership may be supporting them as a way of keeping peace in the countryside, but they are elections just the same, and the grassroots population is getting experience in democracy, a process assisted by the International Republican Institute. I believe this experience one day will make a profound difference in the evolution of more freedom and democracy in China.

• Second: Is China an enemy of the United States? How one views any national security threat depends, at least in part, on how one sees China--as an enemy, a prickly partner, or a potential ally. Last year at this podium, I said that we should not assume that China is our enemy. There are no data to support such a conclusion. But I also said that if, over time, China were to become our enemy, it should not occur because our government's policies or actions have pushed China in that direction. Nothing has happened to change my point of view. We should not assume that China is the enemy of the United States and we should not act that way. It will become a self-fulfilling prophecy.

• Third: The allegations that China conspired to influence our political process are viewed differently depending upon whether China is viewed as the enemy. We would probably all agree that we cannot condone illegal contributions to a U.S. political campaign. If the Chinese did it--the People's Liberation Army or someone else--it was naive and even stupid. For those who believe that "Communist China" is inherently bad and that China is our enemy, it is easy to believe that China conspired against our electoral process. But we should not forget one very salient fact: In 1996, for the first time ever, a presidential election effort--the Clinton-Gore campaign and the Democratic National Committee--devised and implemented a strategy of going after foreign money. It is not surprising, therefore, that the Chinese were asked to contribute. Let us not lose sight of who was asking.

It is difficult to say where these differing perspectives will lead us, and we need the facts. One thing is clear, however: The future direction of the U.S.-China relationship hangs in the balance.

The U.S.-China Relationship

During the first four years of the Clinton presidency, the inconsistency and ad hoc decision-making that epitomized its approach to China was a factor in causing the government-to-government relationship to dip to its lowest point in years. We know that China can be very difficult, too. There was distrust on both sides. Now, more than a year into the second Clinton term, things have improved. President Jiang's visit here in fall 1997 was a key step followed by President Clinton's visit to China this year. It is unfortunate that the President's trip was moved up to June from the fall. I would not have advised any U.S. President to go to China in June so long as the memories of the 1989 Tiananmen Square massacre are alive here. The atmosphere is complicated further by the many allegations and concerns filling the airwaves.

I continue to believe that we need a framework for our relationship with China. This does not mean being "soft" on China. It does not mean giving up our values. May we never lose our passion for individual freedom; for free markets; for decency and hard work. It does not mean lessening our national defenses; our concerns for national security; our vigilance in assessing what is going on in the world. This, in essence, was the philosophy of the ardent anticommunist President Richard Nixon when he re-established relations with the communist regime in China in 1972.

Having a framework does mean that our government must be clear about its objectives for the relationship. China must understand the U.S. point of view and we, in turn, must try to understand China's. We need to identify every strand of the relationship--human rights, nuclear proliferation, and so on--the areas in which we agree and those in which we do not. Dialogue at the highest levels must continue, and each strand of the relationship must be managed for results and for the longer term. We need to prioritize the varying strands while we manage the relationship as a whole. Underpinning the strategy is consistency in policy and in its implementation.

What should we call this approach? Engagement seems a shopworn moniker. Perhaps connectivity is a better word to describe a policy that allows us to interact with another country to achieve our own objectives, to neutralize the objectives of others with which we disagree, and to cooperate for the global good. I can also observe that a policy--any policy--may be the proper one, but if implementation is faulty, the policy is often blamed. This may be one of the problems critics of engagement have today. In any case, there is no other approach that makes sense other than to stay "connected" with China. China's sheer size makes it impossible to ignore or to isolate. It is in our economic interest to continue our trading relationship with the world's largest market. We want to continue to have dialogue around a number of issues--from human rights to North Korea's intentions to the environment to nuclear proliferation. Connectivity is the only approach that will bring China into the international community as a responsible member and move it inexorably toward freedom and democracy.

I want to digress for a moment to say a few words about U.S. leadership in the world. We are the lone superpower; however, our power position today is very different from years ago. During the years after World War II, when there were fewer than 50 countries in the world, we were the predominant economic power. Although we still are the world's largest economy, we lack the dominance of those earlier years. Back then, we were one of two nuclear powers. Today, various other countries have joined the nuclear club.

Today, there are nearly 200 countries in the world, and our power--economically, politically, and militarily--therefore has been diluted. That means a different brand of leadership is required. Telling other countries what to do and how to do it no longer works. Not only does it not this work, it causes a great deal of resentment, which, in turn erodes our leadership position further. The United States today must lead both by example and by building alliances and consensus. This means a different mindset--one that seeks to understand other cultures and the realities faced by other countries as they move toward free markets and democracy at the same time. It means more time spent consulting with other countries, building trust, and cultivating the alliances we need. I fear we still have too many policymakers who think we can order the rest of the world to do as we do.

Why MFN Renewal is More Important than Ever

The reasons to renew MFN for China are important and have not changed since we had this same discussion last year. Here they are:

• Denying, delaying, or conditioning MFN would have negative economic consequences for the United States. At least 200,000 U.S. manufacturing jobs were directly dependent on U.S. exports to China last year, and thousands of service jobs are indirectly linked.

• Anything other than unconditional MFN renewal would have a negative impact on China's reform process and on our efforts to encourage China to open its markets further. There would be a negative impact on the process of China's accession to the WTO on acceptable terms. It is in the interest of the United States and that of the entire world that China's reform process moves forward successfully and that China joins the WTO. A prosperous and stable China is more likely to be a responsible member of the world community.

• Denying MFN to China would hurt Hong Kong, whose economy already is under pressure because of the problems of the region. GDP growth turned negative in the first quarter of 1998. The handover a year ago went well. China is keeping its side of the 1984 Joint Declaration, and the basics of Hong Kong have not changed. It would be most unfortunate if U.S. action were to damage Hong Kong's economy further at this precarious time.

• Denying or conditioning MFN to punish China because we have grievances in other areas is doomed to fail. There now are a variety of studies that show that economic sanctions, especially if the United States employed them unilaterally, simply would not work to correct a plethora of other problems.

• But the most crucial reason that MFN is so important this year is related to Asia's economic problems. It probably will take another two years for the situation to stabilize and begin to turn around. Denying or conditioning MFN for China will add another note of instability and uncertainty to the region; surely, this will cause the economic problems to worsen. As it is, currencies in a variety of countries--South Korea, Indonesia, Thailand, Malaysia, and the Philippines--have been considerably devalued. Stock markets in those countries, as well as in Hong Kong, have been badly hurt as well. Much wealth has been lost. And Japan, the largest economy of the region, is sinking into recession with no turnaround in sight. We here in the United States have not been affected much so far, and our economy is performing splendidly. However, our export growth is slowing because of Asia's problems. The growth of corporate earnings will slow, and so will our GDP growth. So, if we were to deny or condition China's MFN renewal, we would hurt not only the region, but ultimately our own economy. We cannot afford to do this. The global economy, which is being led by the U.S. economy, cannot afford this. We here in the United States should not wish to precipitate the global recession that is still a possibility.

There simply can be no rationale to deny or condition MFN for China. I have said before that I look forward to the day in which MFN for China becomes permanent. We have permanent MFN with most other countries, including rogue states like Libya and Iraq, and also with what The Wall Street Journal calls "rogue democracies," like India and Pakistan. Let us put this annual ritual behind us and continue to move toward a constructive relationship with China.

In closing, it is appropriate to use the words of President Nixon as he reflected on China long after his historic mission in 1972. In his 1990 book In the Arena: A Memoir of Victory, Defeat and Renewal, Nixon wrote

In four visits to the People's Republic of China from 1976 to 1985, I saw the country evolve from one of the world's most reactionary, doctrinaire Communist Nations into one of its most progressive in terms of breaking free from the dead hand of Marxist ideology. One hundred and sixty years ago, Napoleon had called China the "sleeping giant." Today, China has become an awakened giant. It has left behind forever its policy of self-imposed isolation of the 1960s and will for the foreseeable future represent a major geopolitical power center in world affairs.

As for the future of U.S.-China relations and our annual MFN debate, Nixon advised in Beyond Peace (1994) that

We cannot improve the political situation in China through a "scorched earth" economic policy. Revoking China's MFN status would hurt the free-market reformers and entrepreneurs who hold the key to China's future. Not only would it devastate the mainland's economy, it would lay waste to the surrounding region as well.

Some have said that if the twentieth century was the American century, the twenty-first will be the Asian century. The twenty-first can be a second American century--but only if we understand that we must be as intimately involved politically, economically, diplomatically, and culturally in the Asian-Pacific region as we have been in Europe.

This must be our mission if we are to shape and safeguard the U.S.-China relationship as well as to safeguard our national interest. We cannot do otherwise.

-- Barbara Franklin, a former U.S. Secretary of Commerce, chairs the American Trader Symposium at The Heritage Foundation