If the most imaginative fiction writer had set about writing a script for the U.S.-China relationship during the past year--from June 1998 until June 1999--he or she would have had to stretch to dream up what has actually happened. In this case, truth is indeed stranger than fiction.

Consider these events:

• In June of last year, President Clinton visited China. Both sides proclaimed the trip successful in strengthening the bilateral relationship.

• In early January of this year, Chinese Premier Zhu Rongji sent a message that China was ready to accelerate negotiations regarding its accession to the World Trade Organization (WTO). Momentum in this 13-year process picked up. The Clinton Administration signaled that reaching a commercially viable agreement would be welcome prior to the November WTO ministerial and the launch of a new round of multilateral negotiations.

• January 12 marked the 20th anniversary of the establishment of U.S.-China diplomatic relations. At the Chinese embassy celebration in Washington, the U.S. Secretary of State lectured China about human rights and spoke of "friendship" between the two nations.

• On April 4, the U.S. national press broke the story that Democratic fundraiser Johnny Chung, who had pleaded guilty to election law violations and was cooperating with the Justice Department, had admitted that Chinese intelligence official General Ji Shengde had given him $300,000 for Clinton's re-election campaign. This revelation intensified earlier allegations about China's efforts to influence the U.S. election.

• The next week, Chinese Premier Zhu Rongji visited the United States. Bilateral agreements increasing U.S. access to China's market for citrus, meat, and wheat were concluded and announced, and there was considerable expectation that the WTO agreement might also be concluded. On April 8, negotiators on both sides thought they had a deal. The U.S. Trade Representative's office circulated a 17-page document detailing the terms, which in most cases greatly pleased the U.S. business community. Premier Zhu had delivered more concessions than many thought possible. But later that day, President Clinton said "no." Several days later, softening his "no," the President called the Premier to say that negotiations should proceed with dispatch. That was April 13.

• On May 7, the NATO forces participating in the air war in Yugoslavia mistakenly bombed the Chinese embassy in Belgrade, killing three Chinese citizens. The Chinese government reacted angrily, insisting that the bombing was intentional. There were anti-U.S. demonstrations lasting several days in various cities in China. Crowds throwing rocks besieged the U.S. embassy in Beijing, and the ambassador was unable to leave for three days. The Chinese set forth four conditions. One of these was an apology--which they got from President Clinton.

• On May 25, the so-called Cox Report--formally titled U.S. National Security and Military/Commercial Concerns with the People's Republic of China--was issued in sanitized form by the Select Committee of the U.S. House of Representatives chaired by Representative Christopher Cox (R-CA). This voluminous report alleges the stealing of U.S. military secrets by China and offers recommendations to prevent such incidences in the future.

• On June 3, President Clinton made known his intention to renew normal trade relations (NTR) with China for another year.

• At about that same time, the Western press was filled with recollections of the Chinese government's forcible crackdown on the democracy movement at Tiananmen Square ten years ago.

• On June 15, Under Secretary of State Thomas Pickering was sent to Beijing, together with a small delegation, to explain how the mistaken bombing of the Chinese embassy had occurred.

• On June 17, Chinese Foreign Minister Tang Jiaxuan said this explanation was unacceptable, and Minister of Foreign Trade and Economic Cooperation Shi Guangsheng indicated that WTO negotiations could not resume at this time.

What will happen next is not clear. However, it is obvious that these events have complicated an already complex relationship. Mistrust on both sides is great, and the relationship may well be at its lowest point in recent memory. Differences between the two countries--in ideology and in perception--are in sharper relief than in years past.

And we do view many issues differently. Among these are political ideology, human rights, the U.S. commitment to Taiwan, the possible intentions of China's military and what it will do with the stolen nuclear secrets, China's promise to abide by the 1984 agreement regarding Hong Kong, China's role in nuclear proliferation, China's efforts to influence our 1996 election, and the appropriateness of the war over Kosovo. In addition, there are the obvious differences in geography, culture, and history.

However, despite our differences and disagreements, there are areas in which the two countries have cooperated. Working toward a solution to the nuclear threat from North Korea is one example.

The Economic Relationship Is Now the Foundation of the Bilateral Relationship

There is one thing that stands out with stunning clarity: the mutual interest in preserving and expanding the bilateral economic relationship. We recall that this was not the way the recent U.S.-China relationship began.

In 1972, when President Nixon made his historic trip to China during the height of the Cold War, the major reason was to establish a counterweight to our adversary, the Soviet Union. That reason no longer exists. The bedrock of the U.S.-China relationship in today's new globalized era is economic. This causes me to think that we need to change our mindset generally about the way we view the link between economic matters and national security, and I will comment a bit more on that later.

The Chinese need the U.S. market. Last year they sent about $71 billion in exports here. During the past two years of the Asian financial crisis, China's overall export growth slowed. But the shipments to the United States did not. Had the U.S. economy been weaker or less open, China might not have weathered the Asian storm. It might have been forced to devalue the reminibi, which would have dealt another blow to the region.

Additionally, the Chinese leadership recognizes that foreign direct investment is important to the continued growth of China's gross domestic product. Foreign investment in China has also slowed in recent years. But, it is interesting to note, in the first quarter of this year, investment dollars from the U.S. are up 14 percent over the same quarter last year.

On the U.S. side, our businesses have grasped the great potential of the Chinese market. China's huge population--1.2 billion people combined with its double-digit growth rate during much of the past two decades--is creating demand for virtually everything we make, provide, or sell. We are also aware that export expansion is important to keeping the U.S. economy growing. From just a trickle of exports in the 1980s, China is now our fourth-largest trading partner.

However, there is an imbalance. China sends more here than we send there, and the trade deficit reached a record of nearly $60 billion last year. Over time, that imbalance can and must be corrected. We will gain more access to various sectors of the China market in several ways:

• Through bilateral agreements, such as the one signed when Premier Zhu was here in April;

• When China joins the WTO and comes under this trading regime, a precondition of which is more market access and the elimination of other trade barriers; and

• As demand in general grows in China and as specific demand for U.S. products and services increases.

But Are We Losing Our Principles?

Let me digress for a moment to acknowledge that there is a body of opinion here that believes overemphasis on the commercial relationship is too crass and too materialistic and that we have lost our principles. There are those who believe we should close down some of our markets and use this leverage to force China to change its human rights policies and/or punish that country for trying to influence our elections or steal our military secrets.

I disagree.

Being realistic about where our national interest lies does not mean that we give up anything, certainly not the principles upon which our great country was founded--individual freedom and free markets under a rule of law, decency, hard work. Our democracy protects the freedom of our markets and nurtures our entrepreneurial spirit. Free and open markets are the foundation of our strong economic system, which in turn reinforces our democracy. These are our principles. We take great pride in them, and they are the reason that the United States of America is the greatest nation on the face of the Earth.

But let us be realistic. We are the lone superpower, but we are not the predominant power we were after World War II, when there were only about 50 countries in the world. Now there are nearly 200, and our power has been diluted. We are not in a position to tell other countries what to do and how to do it. That reality necessitates our being clearer and more incisive in assessing where U.S. interests and values lie.

In the case of China, building our commercial relationship under terms that are fair is both in our national interest and in keeping with our principles. We should remember that China is more open and freer today than it was 20 years ago, in large part because of this commercial relationship.

And even if we wanted to punish China by keeping some of its products out, it is not clear that we could get the results we want. I base that conclusion on several recent studies documenting that economic sanctions and market closings rarely cause the desired change in the targeted country, especially if the sanctions are unilateral. Instead, such actions can invite harm to our commercial activity, which can slow down the U.S. economy.

The Spy Scandal

Another sore point at this moment is the Cox report and its implications. Spying by one country on another has gone on since the beginning of time. Every country with enough resources will do it. We here in the United States have the most secrets to steal--military, technological, and commercial--and are the natural target.

This report alleges that the Chinese have undertaken systematic efforts to steal our military secrets. It indicates that the Clinton Administration was lax, and sensitive technology was stolen. The steps now underway to remedy the situation should be implemented quickly, and the need to protect sensitive information should be instilled in everyone in our government--and in the private sector--working with such material.

But no matter who has stolen secrets from us, it is only wise and prudent that we be prepared for whatever may confront us in this post-Cold War arena. Be it armed conflict, nuclear conflict, terrorist activity, or something else, our defense establishment must anticipate what lies ahead and employ the best technology, resources, and wisdom to keep our defenses strong. Our credo should be these famous words, which date back two centuries: "Eternal vigilance is the price of liberty."

We can be angry with China for spying; but in the end, how we deal with our national security is the responsibility of the U.S. government. This may necessitate a rethinking of some export controls governing certain sensitive technologies. But beyond that, our disappointment with China's activities should not be used as a weapon to degrade the U.S.-China economic relationship.

The Guts of the Economic Rrelationship: Normal Trading Relationship and WTO Accession

The aspect of the economic relationship before us at this moment is NTR renewal for another year. Renewal is in our interest and in China's interest, and it is the right thing to do. The reasons are much the same as they have been in other years:

• Approximately 200,000 U.S. jobs depend on exports to China, and thousands of service jobs are indirectly linked.

• We need to be active there to continue creating demand for our products as this huge market grows.

• U.S. companies have contracted considerable amounts of foreign direct investment in China--investment we wish to protect.

• The U.S.-China trade tie helps to create stability for the entire Asia-Pacific region, especially Taiwan and Hong Kong.

This year's action on the resolutions to disapprove the extension of NTR is more crucial than usual because, as we have pointed out, the commercial aspect is now the foundation of our relationship with China. To disrupt NTR now is to destabilize the bilateral relationship and possibly destabilize the region at a time when recovery from the financial crisis is far from over. Therefore, approving the resolutions would not be in America's best interests.

Beyond NTR, we should push for our other trade-related concerns. WTO accession is high on the list. We should resume negotiating when the Chinese are ready. They will do so as soon as the crisis over the Belgrade bombing recedes and the Beijing leadership believes it has extracted its pound of guilt from the U.S. and proved its toughness at home.

They will do so also because a majority of the Beijing leadership recognizes that belonging to the WTO has benefits for them. A more open China will spur the process of reform of the inefficient state-owned enterprises and banks, challenging them to be more competitive. WTO membership also signifies another step toward China's coming of age as a power in the international community--a status the leadership very much wants.

Precisely when negotiations will resume is an open question. Premier Zhu is thought to be the architect of China's WTO push. However, his embarrassing experience here in April, followed by the Belgrade bombing, is probably causing him to have to rebuild consensus that WTO membership is good for China and that the concessions he had offered are appropriate. Nonetheless, the longer the Chinese wait, the more difficult it becomes to fulfill the requirements of accession prior to the November ministerial.

How Should the United States Handle This Complex Relationship?

For years, I have advocated a framework for dealing with China. Our government must be crystal clear about its objectives. It must identify every strand of the relationship, including trade, human rights, nuclear proliferation, and the spy scandal, among others--areas where we agree and where we don't. Our policymakers must manage each strand while managing the relationship as a whole.

We should press hard for all of our objectives, both bilaterally and multilaterally, without being "soft" on China and without punishing the economic relationship. Consistency in policy is important--no flip-flops of the sort we experienced in the recent past.

Changing Our Mindset

Finally, the prominence of the economic aspect of the U.S.-China relationship leads me to make another observation: We need to view this new global landscape with different eyes.

Our traditional way of viewing foreign affairs for the past 50 years was through a Cold War prism. National security was the paramount concern, and the threat of nuclear war was a reality. International economic matters were viewed as lesser in importance and were often tools to achieve other ends in our Cold War maneuvering.

National security and economic advantage have always been linked. But in today's post-Cold War arena, this linkage must be rethought. There are several reasons. We no longer have a global conflict and two armed nuclear camps, one bent on world domination. The overwhelming desire of virtually every nation is to grow and become prosperous. There are astonishing advances in technology allowing capital to move around the world electronically in the blink of an eye and commercial transactions to take place in cyberspace.

This is a different world. This is a drastic change from the era of nation-states, rather self-contained, dividing into armed camps. In that world, each government could control, more or less, its own military defenses and protect its own national security. In this new world, dominated by capital flows, trade, technology and electronics, governments can still establish their own national defenses, but they have very little control over these market forces.

The Asia financial crisis of two years should leave us with no doubt about the magnitude of change. Once trouble came and investors from around the world decided to pull out of the crisis countries, there was precious little that any government could do about it. The power of investors--of the marketplace--prevailed.

The irony is that the underlying cause of the crisis was the policies of those very same governments. They were directing too much capital into certain sectors without regard to market forces, perhaps because somebody wanted to build the tallest building in Asia or because somebody's cousin was at the other end of the capital stream. Some of that capital came from banks--without the discipline of risk-based lending and proper supervision. There was too much short-term money--often in foreign-denominated notes--invested in long-term projects. There was too little transparency and too much corruption.

Then, when in Thailand's real estate sector a little problem mushroomed, investors reacted. You know the result. Currencies were devalued and stock markets declined. Thailand, South Korea, Indonesia, Malaysia, and the Philippines were robbed of much of their wealth.

What can be done to avert this in the future? Broadly stated, transparency is probably the only answer. The reason: Governments simply cannot keep up with market forces today, and no government in its right mind would give up sovereignty to some international regulatory body. If there is another crisis one day--and there will be--we can hope to head it off if we have an early warning. Transparency in the reporting of a country's various economic indicators is the most effective way to know where trouble is emerging.

The question is: What does this have to do with national security? A lot, I believe. A financial crisis and devaluation can rob a country of much of its wealth. That can sap its economic strength and its ability to maintain its national defenses. A country can become vulnerable in many other ways, too, if there are economic predators afoot, all to the detriment of its citizenry.

I think international economic concerns must have more parity with national security in our thinking. No longer should economics be considered an everyday tool to accomplish national security or diplomatic purposes. We have noted earlier that economic sanctions--especially unilateral ones--often do not work. But what I am suggesting is that we change our mindset and begin looking at the world differently.

We need to give higher priority to understanding this fast-paced global arena where technology is pushing the envelope every day. We need to better understand the risks associated with economic calamity around the world and the potential impact on the U.S. economy, our people, and our institutions. In other words, we must be aware of and sensitive to everything that is going on in the world, the interconnections, and the ripple effects. Once again, that old adage applies: "Eternal vigilance is the price of liberty."

The United States, as the lone superpower, must lead the world. But the quality of our leadership will depend, at least in part, on our understanding of the new economic realities and their implications for our national security. When I was Commerce Secretary, our rallying cry was "Commerce is the new front line." It was true then, and it is true now. Commerce is the new front line.

Barbara Hackman Franklin, a former U.S. Secretary of Commerce, is a Distinguished Visiting Fellow at The Heritage Foundation.